The Wagner Daily | June 10, 2005

Commentary:

Continued leadership in the Semiconductor Index ($SOX) led the major indices to broad-based gains on increased volume yesterday. On Tuesday and Wednesday of this week, the broad market traded higher in the morning session, but reversed in the afternoon and closed at the lows. Yesterday’s action was the opposite, as the major indices spent the morning chopping around at the lows, but rallied at mid-day and closed near their intraday highs. This is the more typical behavior that was exhibited by the broad market throughout its May uptrend. The Nasdaq resumed leadership and gained 0.8% yesterday. The S&P 500 Index moved 0.5% higher and the Dow Jones rose 0.3%.

Volume levels confirmed yesterday’s stock market gains, as total volume in the NYSE rose by 8%. Volume in the Nasdaq, however, was only 2% higher than the previous day’s level. Both the S&P 500 and Nasdaq Composite have closed lower in three of the past five sessions. However, only one of those three down days was a “distribution day,” meaning the market closed lower AND on higher volume. Of the two up days, one was an “accumulation day,” meaning the market closed higher AND on higher volume. This means selling has not been heavy, while buying interest on the up days remains strong. Overall analysis of the price to volume relationship of the past five days tells us the broad market’s recent losses were a normal, healthy correction to May’s solid gains as opposed to the start of a bearish trend reversal.

On June 8, the Nasdaq Composite closed 0.3% lower, but the $SOX Index actually gained 0.6%. When you see this type of divergence within a particular industry sector, it is a sign of relative strength. Sectors with relative strength are the last ones to fall if the broad market does, but are the first to surge to new highs when the broad market goes up. Therefore, it’s not surprising that the $SOX maintained its relative strength by gaining more than twice the percentage gain of the Nasdaq yesterday. The Nasdaq Composite gained 0.8%, but the $SOX cruised 1.9% higher. Because the $SOX was strong enough to close higher, despite a lower close in the Nasdaq the previous day, it was the first sector to blast off when the Nasdaq got in sync and also moved higher.

The relative strength in the $SOX during the past two days enabled SMH (Semiconductor HOLDR) to close at a new 11-month high yesterday, but QQQQ (Nasdaq 100 Index Tracking Stock) still remains below its June 2 high. The price retracement of the past week was also steeper in the Nasdaq than in the $SOX. The daily charts of QQQQ and SMH below illustrate the relative strength in SMH (and most semiconductor stocks) versus QQQQ over the past several days:

After comparing the two charts above, it should become clear why MTG is currently long SMH as opposed to QQQQ. Buying sector ETFs with relative strength decreases your risk of loss if the broad market tanks, but also increases your profits in a strong market. This is because sectors with relative strength will outpace the percentage gains of the broad market. MTG consistently focuses on buying sector ETFs with relative strength to the broad market, while shorting sector ETFs with relative weakness.

Not only does the daily chart of SMH look good, but remember that SMH also bounced perfectly off major support of its 200 MA on its weekly chart as well. Yesterday’s closing price of 35.30 put SMH above resistance of its prior weekly high, which also happened to be a double top. The longer-term weekly chart of SMH simply looks great:

Nothing new regarding support and resistance levels on the S&P and Dow. The S&P bounced off its 1,191 support level yesterday, while the Dow bounced off its 20-day MA. Short-term pivotal resistance on the Dow is at the 10,550 to 10.570 range, while the S&P has resistance at 1,205 to 1,208. As has been the case for the past six weeks, the Nasdaq, and especially the tech-related sectors, is the place to be right now. Tech is hot again, so you probably want to avoid the long side of former market-leading sectors such as Energy, Retail, Financial, and Basic Materials. Trade what you see, not what you think!

Today’s Watchlist:

There are no new trade setups today, as we currently have three open positions (SMH and PPH long, RTH short).

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 = + $144

PPH long (from June 7) –
bought 74.56, stop 73.20, target 79.60, unrealized points = (0.73), unrealized P/L = ($73)

RTH short (from June 9) –
shorted 94.55, stop 96.35, target 88.30, unrealized points = (0.66), unrealized P/L = ($66)

Notes:

Per intraday e-mail alert, we entered PPH long about 10 cents before its original trigger price.

Edited by Deron Wagner,
MTG Founder and
President