The Wagner Daily


The broad market followed up last Friday’s high volatility with a session of narrow-range consolidation yesterday. The major indices spent the day oscillating between positive and negative territory before closing the day slightly higher. The Nasdaq Composite gained 0.2%, while both the S&P 500 and Dow Jones Industrials moved 0.1% higher. In the S&P, leading sectors were Airlines ($XAL), Healthcare ($HCX), and Retail ($RLX). The Internet Index ($GIN) showed the most relative strength within the Nasdaq yesterday. Both the Semiconductor Index ($SOX) and Biotech Index ($BTK) closed 0.4% lower, but such a correction is small given how much both sectors have rallied in such a short period of time.

Total market volume once again declined, as turnover in both the NYSE and Nasdaq came in 9% lighter than the previous day. Market internals were mixed. We would normally want to see higher volume on an “up” day, but yesterday’s lighter volume could actually be considered bullish. Recall that the major indices dropped substantially last Friday, but did so on lighter volume than the previous “up” day. The broad market closed higher yesterday, but still within the lower third of Friday’s intraday range. Yesterday’s lighter volume therefore indicates that the bears did not use Friday’s weakness as a chance to follow through with more selling yesterday. Because yesterday’s gains were minimal, a day of heavier volume would not necessarily have been a positive. Heavier volume on minimal gains often indicates “churning,” which is bearish if it occurs at the lower end of a range.

In yesterday’s Wagner Daily, we analyzed the key short-term support and resistance levels of the major indices. The 200-day MA held firm as support on the Dow yesterday, while the S&P held at its 1,191 support level. Yesterday’s action did little overall to change the technical picture of the major indices. The same support and resistance levels we discussed in yesterday’s Wagner Daily are valid going into today’s session.

For those of you who are long any Semiconductor stocks, watch the 426 level in the $SOX as a key support area. This level is important because it marks new support of the 200-week moving average. Prior to two weeks ago, the $SOX had been trading below resistance of its 200-week moving average since March of 2002. But the 200-week moving average has since become the new support level for the $SOX. Remember that prior resistance levels become the new support levels after the resistance is broken. Therefore, we now expect the $SOX to hold firm over the 426 level, although it would not be surprising to see the index probe below 426 for a day or two. Similarly, SMH (Semiconductor HOLDR) has new support of its 200-week moving average at the 34.01 level. We circled support of the 200-week MAs on the weekly charts of both the $SOX index and SMH below:

Another sector that looks interesting now is the Pharmaceutical Index ($DRG). On the daily chart, there is nothing special about the recent price action. However, a look at the longer-term monthly chart of the $DRG shows the index has drifted back down to new support of a former 4-year downtrend line that was broken in April of 2005. The monthly chart below illustrates this:

We feel the new support of that multi-year downtrend line in the $DRG index provides a low-risk entry point for many Pharmaceutical stocks at current levels, but only if you are looking at an intermediate-term time horizon. As such, we are now targeting PPH (Pharmaceutical HOLDR) for an intermediate-term long entry. Details are listed below in “Today’s Watchlist.”

Today’s Watchlist:

PPH – Pharmaceutical HOLDR

Trigger = above 74.65 (above the 50-day and 10-week MAs)
Target = 79.60 (resistance of the 200-week MA)
Stop = 73.20 (below support of prior low)

Notes = The retracement down to support of the prior downtrend line provides a good risk/reward ratio for new long entry here. However, be aware the expected time horizon of this trade is 1 to 3 months, a bit longer than our usual trade entries.

RTH – Retail HOLDR

Trigger = below 94.25 (below hourly uptrend line)
Target = 88.30 (support of the May 2005 low)
Stop = 96.10 (above last week’s high)

Notes = This trade setup did not trigger yesterday, but we are listing it again today because we still like the setup. Note the new trigger price above. RTH has been in a downtrend on its weekly chart for the past three months, but has bounced into a major resistance level that provides a low-risk entry point to enter a new intermediate-term short position. The 40-week MA, as well as major horizontal price resistance at the 94 to 95 range, stopped last week’s rally attempt. We now feel RTH is poised to head back down to test its prior lows.

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:


Open Positions:

    SMH long (from June 1) –
    bought 34.82, stop 31.70, target 44.90, unrealized points = (0.14), unrealized P/L = ($42)


No changes to positions.

Edited by Deron Wagner,
MTG Founder and