The Wagner Daily | July 18, 2005

Commentary:

The major indices capped a strong week with small gains last Friday, bringing the winning streak in both the S&P 500 and Nasdaq Composite to seven consecutive days. After spending most of the session in a narrow, sideways range, bulls stepped in during the final ninety minutes of trading and lifted the broad market into positive territory. Both the S&P 500 and Dow Jones Industrials gained 0.1%, while the Nasdaq Composite moved 0.2% higher. The S&P 400 Mid-Cap Index and the Russell 2000 Small Cap Index both kept pace with the major indices this time and posted gains of 0.2% and 0.1% respectively. For the week, the Nasdaq led the way with a 2.1% gain. The Dow Jones, which began playing “catch up” with the Nasdaq and S&P last week, logged a 1.8% gain. The S&P 500 closed 1.3% higher for the week. All three of the major indices locked in their third straight week of gains.

Total volume in the NYSE declined by 16%, while turnover in the Nasdaq came in 18% lower than the previous day’s level. It’s always better to see an increase in volume on the “up” days, but note that the prior day’s volume was the highest of the past three weeks. It is also common to see lethargic volume levels on mid-summer Friday sessions. Market internals were mixed across the board.

Our long position in BBH (Biotech HOLDR) hit its trailing stop of $183.75 on Friday, enabling us to secure a gain of 15.75 points on the remaining shares. Factoring in the first half of the position that we sold on July 12, we netted an average gain of just over 13 points (7.8%) on the trade. In addition to the recent long entry in FXI, we are still long the SMH position from our June 1 entry of $34.82. Because we have been holding this position for the past six weeks, let’s take an updated look at our profit targets. The weekly chart of SMH below illustrates our two price targets of $38.85 and $44.90, and also indicates the new area of support:

Looking at the chart above, notice how the 200-week moving average (the orange line) has become the new support level. After breaking out above it in late May, SMH subsequently tested new support of its 200-week MA over the next seven weeks that followed. SMH set a 52-week closing high two weeks ago, then broke out and closed above horizontal price resistance last week. One of the most basic tenets of technical analysis is that prior resistance levels become the new support levels after the resistance is broken. As such, the prior double top from December 2004 and March 2005 (the blue horizontal line just below $35) should now act as a major, long-term support level on SMH. The 200-week MA provides even more support just below that.

Analyzing the upside profit potential of SMH, our first profit target is the $38.85 area. We established this level as a target because it represents resistance of the prior weekly high from June 2004. It also correlates to resistance of the 61.8% Fibonacci retracement level, as measured from the January 2004 high down to the September 2004 low. As such, we plan on selling half of the SMH position near this area, then trailing the stop higher on the second half of the position. Our subsequent price target where we intend to sell the remaining shares is just below resistance of the 3-year high, near the $45 level. The momentum that SMH has gained over the past two weeks gives us confidence that it should achieve its first price target of $38.85 within the next one to two weeks (perhaps sooner).

As for the broad market, the weekly charts of the major indices are looking bullish overall. The Nasdaq Composite has closed above its prior resistance of the 2,100 level for the past two weeks, so that area should now act as support on any major retracement. The resistance level to watch in the upcoming week is the prior weekly closing high of 2,175, followed by the intra-week resistance of 2,191:

The S&P 500 Index closed at a fresh 4-year high last week, so there technically is not any significant overhead resistance. Support is the prior high around the 1,219 level, which we illustrated with a horizontal blue line on the weekly chart below:

The Dow Jones Industrial Average is still well below its 52-week high, but it began to show relative strength throughout most of last week. The index set a 4-month closing high last week, but it also closed right at resistance of its prior intra-week high from last month. Watch the 10,656 level in the coming week, as a breakout above that would be quite bullish for the index. The daily chart below illustrates the prior high from June:

Stocks and indices that are trading at multi-year highs, such as SPY (S&P 500), typically continue to go much higher simply due to a lack of overhead supply. A good example of this is the Biotech Index ($BTK), which closed each of the past three weeks at a new 3-year high. It keeps going higher because there are not any investors who are selling in an attempt to “break even” from a prior entry point. Therefore, the best way to manage a position that is at a multi-year high is to trail a stop rather than setting a specific price target. A simple but effective method for doing this is to trail a stop below the prior day’s low if you are a swing trader. Longer-term traders may wish to use the prior week’s low instead. After BBH began to rally sharply last week, we switched to a trailing stop that was below the prior day’s low. We recommend you implement a similar strategy to maximize and protect profits on any long positions that are trading at 52-week highs.

Quarterly earnings season kicks into high gear this week, with many important companies reporting their results. Both Bank of America and Citigroup report before today’s open, while IBM reports after today’s close. Intel reports after tomorrow’s close. Check the free Yahoo! Finance earnings calendar to check earnings dates of any other companies.

Today’s Watchlist:

There are no new trade setups for today, but we remain long both SMH and FXI.

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:

net P/L = + $786

Open Positions:

unrealized P/L = + $648

FXI long (from July 14) –
bought 57.95, stop 55.70, target (new highs, will trail stop), unrealized points = (0.21), unrealized P/L = ($63)

Notes:

BBH hit our trailing stop last Friday, but we remain long both SMH and FXI with the same stops.

Edited by Deron Wagner,
MTG Founder and
Head Trader