The Wagner Daily | June 16, 2005

Commentary:

After beginning the day with an opening gap higher, the broad market rapidly sold off, but it reversed at mid-day and closed higher on increased volume. At 12 noon EDT, when the broad market was trading at its intraday low, both the S&P 500 and Dow Jones Industrial Average were off by 0.5%, while the Nasdaq Composite was trading 0.8% lower. But the major indices rallied throughout the afternoon and closed at their intraday highs. Both the S&P and Dow gained 0.2%, while the Nasdaq closed 0.3% higher. The S&P small and mid-cap indexes also continued to build on their recent gains. The most impressive reversal took place in the Semiconductor Index ($SOX), which turned a mid-day 1.5% loss into a 0.4% gain. Throughout the past two weeks, stocks had been starting the day strong, but falling victim to weakness in the afternoon. But yesterday’s end of day strength was the opposite scenario and was quite bullish.

When the major indices were at their worst levels of yesterday’s session, volume in the NYSE was on pace to exceed the previous day’s level by 8% and volume in the Nasdaq was coming in a whopping 31% higher. Had stocks not reversed in the afternoon, yesterday would have become a bearish “distribution day.” However, volume remained high when the the broad market reversed, with total volume in the Nasdaq exceeding the previous day’s level by 20%. Volume in the NYSE increased by 5%. This means that yesterday instead became a bullish “accumulation day.” Also confirming the afternoon reversal was the change in market internals. Throughout most of the day, declining volume was outpacing advancing volume by a wide margin. But internals reversed sharply during the final hour of trading, causing advancing volume to exceed declining volume by a margin of 1.6 to 1 in both the NYSE and Nasdaq.

Although the bulls may have been a bit nervous in the morning, yesterday’s price action was very bullish. When the major indices are consolidating near their highs for several weeks, then suddenly sell off on high volume, this causes the “weak hands” to dump their stocks out of fear. Institutions, however, know that most healthy market uptrends eventually experience “shakeouts” along the way and view these “shakeouts” as buying opportunities. Yesterday morning’s high volume selling with end of day strength was a good example of this. When it becomes too obvious that a market should go higher, a “shakeout” is usually necessary in order to trigger retail sell stop orders so that institutions can buy more. This subsequently generates the momentum for the next advance. The recent breakout above the multi-year downtrend line of the $SOX Index was too obvious, so yesterday morning’s “shakeout” was necessary in order to wash out the “weak hands.”

Another positive of yesterday’s action in the $SOX is that the index probed below support of its 200-week moving average in the morning, but reversed and closed above it. This confirms that the 200-day MA is acting as firm support. The $SOX also fell below support of its recent trading range in the morning, but closed back up in the range. This, in turn, caused a bullish “hammer” candlestick to form on the daily chart of the $SOX. The first chart below (weekly chart) shows how the $SOX probed below its 200-week MA but reversed to close above it. The second chart (daily chart) illustrates the bullish “hammer” candlestick formation:

Similarly, the Nasdaq Composite probed below support of its 20-day MA yesterday, taking out stops, but reversed to close at a 4-day high. It also formed a “hammer” candlestick that is likely to result in follow-through gains over the next several days. The 2,100 level, which is the prior highs from February and March, remains the major resistance level to watch:

The Dow closed at a new 3-month high yesterday and is only a few points away from breaking out above the highs of its 4-week sideways trading range. If it does, you may want to consider a long position in DIA over the 106 level. A stop of about 75 cents below this point would be ideal.

Yesterday’s broad-based “shakeout” now increases the odds of both the Nasdaq and Semiconductor Index breaking out to new highs. It also increases the probability of a breakout being sustained, as rallies above consolidation without prior “shakeouts” often reverse promptly. The “hammer” candlestick formation on the $SOX should result in follow through to the upside over the next several days, at least up to the prior high of the 440 level. Beyond that level, it should be smooth sailing for the Semis. As such, we remain positioned long in SMH, even more confidently after yesterday’s action.

Today’s Watchlist:

BBH – Biotech HOLDR
Long

Trigger = above 167.90 (above yesterday’s high)
Target = new highs (will trail stop)
Stop = 165.10 (below yesterday’s low)

Notes = This setup did not trigger yesterday, but we still like the setup going into today. Note the new trigger price. BBH has been in a solid uptrend for the past two months, but has finally corrected down to support of its 20-day moving average. It has been consolidating in a tight range, which is bullish, so we soon anticipate a reversal back up to the prior high. Notice also how the correction has been on lighter volume, which is what you want to see. BBH is quite volatile, so be sure to reduce your share size accordingly. See the MTG
Position Sizing Model for more details.

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 = + $2

SMH long (from June 1) –
bought 34.82, stop 32.10, target 44.90, unrealized points = (0.56), unrealized P/L = ($168)

Notes:

We remain long both PPH and SMH with same stop.

Edited by Deron Wagner,
MTG Founder and
President