The Wagner Daily | July 14, 2005

Commentary:

Stocks turned in a mixed performance yesterday, as the broad market consolidated and digested its recent gains. The S&P 500 Index traded in a narrow 4-point range throughout the day and finished 0.1% higher, while the Nasdaq Composite also traded sideways and closed unchanged. The Dow Jones Industrial Average showed slight relative strength and gained 0.4%. The S&P 400 Mid-Cap Index and the Russell 2000 Small Cap Index, both of which have been trading at all-time highs, corrected modestly by 0.3% and 0.5% respectively. Performance of the individual sectors we follow was mixed on both sides of unchanged. Most sectors closed within 1% of their previous closing prices. It was a quiet and lethargic session overall.

As we often see on consolidation days, volume in both exchanges declined yesterday. Total volume in both the NYSE and Nasdaq came in 6% lighter than the previous day’s levels. Even though both the S&P and Nasdaq closed fractionally higher, yesterday’s session was basically a “correction by time.” As such, it could be considered bullish that volume was lower. An increase in volume during a consolidation day would have indicated “churning,” which often marks a short-term top. The price to volume relationship in both exchanges remains bullish overall.

Taking an updated look at the broad-based exchange traded funds, SPY (S&P 500 Index) has been trading above its June highs for the past three days and, like the Nasdaq Composite, is within striking distance of its prior 52-week high. Yesterday’s close of $122.43 in SPY was only 36 cents below the prior 52-week closing high of $122.79, which was set on March 7. If SPY can break out and close above that, it will set a new 52-week closing high. However, the March 7 intraday high of $123.25 technically provides a little more resistance. Because prior resistance becomes the new support after the resistance is broken, new support on SPY is at the prior high from June. The horizontal blue line on the weekly chart below marks new support. We have also pointed out resistance of the 52-week high:

DIA (Dow Jones Industrials Tracking Stock) showed relative strength yesterday, but still has the messiest daily chart of the “big 3” broad-based ETFs. There is overhead supply from yesterday’s close of $105.63 all the way up to the June intraday high of $106.51. For this reason, we continue to recommend avoiding long positions in the Dow-related sectors or DIA itself. We have circled the area of resistance on the daily chart below:

Although the Nasdaq Composite has broken out and is now less than 2% off its 52-week high, the less diverse, tech-heavy Nasdaq 100 Index is still trading below its June high. This relative weakness of the Nasdaq 100 means that QQQQ still has overhead supply at current levels and may require more time to break out. Notice this divergence between the weekly charts of QQQQ (Nasdaq 100 Index) amd ONEQ (Nasdaq Composite Index):

The fact that QQQQ has not yet cleared its June high is the reason we have not listed it as a long setup this month, despite strength in the Nasdaq Composite. ONEQ tracks the Nasdaq Composite instead of the Nasdaq 100, but this new ETF has not yet gained popularity and trades an average daily volume of less than 50,000 shares. So, instead of the broad-based ETFs, we chose to focus on our long positions in SMH (Semiconductor HOLDR) and BBH (Biotech HOLDR). SMH provided a good entry because it had broken out above a 4-year downtrend line and subsequently retraced only a nominal amount. BBH was consolidating at new multi-year highs and was therefore free of overhead supply. When the broad market ETFs such as QQQQ are stuck in trading ranges between support and resistance levels, don’t force trade setups that are not clear. You will usually be better off finding individual sector ETFs, such as the ones we listed in yesterday’s Wagner Daily.

Remember that earnings season is upon us, so please be aware of potential earnings reports before entering new positions.

Today’s Watchlist:

FXI – iShares Xinhua China Fund
Long

Trigger = above 57.90 (above last week’s high)
Target = new highs (will trail stop)
Stop = 55.70 (below support of prior weekly high)

Notes = FXI, which tracks China’s Xinhua 25 Index, is poised to set an all-time weekly closing high. As such, we are looking to buy the breakout to new highs. Be aware that our expected time horizon on this trade, if it triggers, will be 2 to 5 weeks. FXI is not currently listed on the MTG Position Model because it is a relatively new ETF, but our position size if it triggers will be 300 shares (1.5 times the normal size of a SPY position). Note also that FXI has a lot of opening gaps because it trades relative to the prior evening’s performance in the Chinese market.

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. 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 = + $605

SMH long (from June 1) –
bought 34.82, stop 34.10, first target 38.85, then 44.90, unrealized points = + 1.70, unrealized P/L = + $510

Notes:

We have trailed the stop higher on the remaining half position of BBH. No changes to the SMH position.

Edited by Deron Wagner,
MTG Founder and
Head Trader