The Wagner Daily | June 3, 2005

Commentary:

The broad market began the day on a weak note, but gradual buying interest throughout the day lifted the major indices to close a bit higher. As we have become accustomed to for the past month, the Nasdaq once again led the way higher yesterday while the Dow lagged behind. It was a choppy day overall, but relative strength in the Semiconductor sector enabled the Nasdaq Composite to move 0.5% higher. The S&P 500 managed a 0.2% gain, but the Dow Jones Industrial Average was unchanged. Of the three major indices, only the Nasdaq closed above the previous day’s high. The Dow’s horizontal price resistance at the 10,550 to 10,570 range, which we have pointed out to you several times within the past week, once again remained firmly intact.

Total market volume in both the NYSE and Nasdaq declined by less than 1%. This means that yesterday’s gains were likely the result of a lack of sellers rather than an abundance of institutional buying interest. Nevertheless, the broad market’s price to volume relationship remains very positive, especially in the Nasdaq. Within the past three weeks, the Nasdaq has had only one day of higher volume selling (“distribution”), but more than half of the “up” days have occurred on higher volume (“accumulation”). Market internals were also healthy yesterday. Advancing volume in the NYSE outnumbered declining volume by a margin of 1.3 to 1. The ratio in the Nasdaq was a little better at 1.7 to 1.

Although the Nasdaq Composite closed only 0.5% higher yesterday, SMH (Semiconductor HOLDR) continued to show impressive relative strength and gained 1.4%. More importantly, SMH broke out above its prior high, which was also a double top, and closed at an 11-month high. Recall that in the June 1 issue of The Wagner Daily, we illustrated how SMH had broken out above a 5-year downtrend line and also closed above its 200-week moving average. The only thing needed at that time to confirm a reversal of the long-term downtrend was for SMH to set a “higher high” on its weekly chart, which it did yesterday. Therefore, if SMH holds those gains to close the week above 34.95, we can declare that the long-term trend is now “up.” The weekly chart below illustrates how SMH closed above its prior high, as well as the double top, and set a new 11-month high:

We remain officially long SMH since June 1, but remember we are looking at a time horizon of several months in order for SMH to reach our upside price target. Because it has closed higher for the past six consecutive weeks, a price correction in SMH near the current level would not be surprising and would actually be healthy for the sustainability of its long-term trend. If you missed the first entry in SMH, any retracement down to the area of its 20-day moving average, presently at 33.37, would offer a low-risk entry point on the long side. Even a pullback down to its 200-week moving average at the $34 area would be okay to enter a partial position.

For those of you who prefer to trade the sector-specific ETFs rather than the broad-based ones, you may want to keep an eye on TTH (Telecom HOLDR), as it appears to be breaking out of its weekly downtrend. Take a look:

As the chart above illustrates, TTH was in a downtrend for the past six months, but it formed a double bottom at the $26 area over the past two months. Last week, TTH broke out above the upper channel of its downtrend line and has closed above its 10-week moving average for the past three weeks. If you wish to enter a long position in TTH, you might consider an upward price target of around $29, just below its December 2004 high. Obviously, that is only a 2-point move from its current price, so that tells us TTH has a very low beta and is not volatile. As such, you may want to pass this trade by if your account is too small to take a decent sized position. Alternatively, you could take a look at individual stocks within the Telecom Index ($XTC). AT&T (T) looks interesting above its downtrend line at the $19 area.

Today’s Watchlist:

There are no new plays for today, but we remain long SMH.

Daily Reality Report:

Below is Morpheus Trading Group’s daily
performance report of closed trades and an update on all open positions from The
Wagner Daily (Intraday Real-Time Room trades are reported separately in The
Wagner Weekly). Net P/L figures are based on the quantity of shares represented
in the MTG
Position Sizing Model.

Closed Positions:

(none)

Open Positions:

unrealized P/L = + $87

Notes:

No changes to positions.

Edited by Deron Wagner,
MTG Founder and
President