The Wagner Daily | July 19, 2005

Commentary:

After a string of seven winning days, the broad market closed lower yesterday, but lighter market volume indicated the losses were simply a healthy price correction. The S&P 500, Nasdaq Composite, and Dow Jones Industrials each lost 0.6% and closed at their intraday lows yesterday. The S&P 400 Mid-Cap Index, which is leading the other indices with a 6% year-to-date gain, showed a bit of resilience by closing only 0.2% lower, but the Russell 2000 Small Cap Index slid 0.8%. Like the major indices, the Semiconductor Index ($SOX) also dropped 0.6% yesterday, but the index has closed higher in 7 of the last 9 sessions. The $SOX has begun to consolidate near its recent highs, but be aware that Intel’s earnings report after today’s close is likely to have a major impact on the short-term direction of the sector.

The most positive thing about yesterday’s session is that the correction occurred on very light turnover. Total volume in the NYSE was 9% lighter than the previous day, while volume in the Nasdaq came in 13% lower. The 1.2 billion shares traded in the NYSE was the lowest volume day since May 27, the Friday that preceded the Memorial Day holiday weekend. Given the broad market’s solid gains of last week, yesterday’s price correction was not surprising, but more important was the lack of institutional selling. Further confirming the light nature of yesterday’s correction is that only a handful of stocks in leading sectors such as Biotech and Semiconductors showed signs of distribution by selling off on higher volume. Declining volume in the NYSE exceeded advancing volume by a margin of just over 2 to 1, while the Nasdaq’s ratio was negative by 1.8 to 1.

QQQQ (Nasdaq 100 Index) lost only 0.4% yesterday and is holding above support of its prior high from June. It has begun to trade in a narrow range near its highs, which will likely lead to new highs within the next one to two weeks. If you are long QQQQ, keep an eye on the July 14 low of $38.52 as an important area of support. It is low-risk to hold a long position in QQQQ as long as it holds above that level, but remember that SMH (Semiconductor HOLDR) is showing more relative strength. The blue horizontal line on the chart of QQQQ below marks support of the prior high from June. Also notice intermediate-term support resulting from convergence of the 20, 50, and 200-day moving averages below that:

Similarly, SPY (S&P 500 Index) also closed just above support of its prior high from June. Watch this level to see how SPY acts on any further test of that support level:

It appears the broad-based indices and the ETFs that track them have begun to consolidate in a narrow range, near their recent highs. As many key companies are reporting quarterly earnings results this week, the broad market will likely remain in a holding pattern until those reports can be digested. Because of anticipated post-earnings volatility, this week is probably not the best time to be entering new positions in sectors whose leading companies are reporting earnings. Instead, focus on managing any open positions you have and preparing a watchlist of any stocks and ETFs you would like to buy in the event of further price correction or consolidation. We continue to feel that Biotechs and Semiconductors are currently the strongest sectors for long positions. We remain long SMH and are looking for a potential re-entry in BBH if a low-risk entry point presents itself. There are not many short setups out there, but Utilities and Oil-related sectors may provide a few opportunities for near-term short selling only. Those sectors remain in solid long-term uptrends, but are exhibiting signs of a short-term top. Notice on “Today’s Watchlist” below that we are looking to short UTH (Utilities HOLDR) in the event of further correction.

Quarterly earnings season kicks into high gear this week, with many important companies reporting their results. IBM reported earnings after yesterday’s close and was trading several points higher in the after-hours market. Both Bank of America and Citigroup report before today’s open, while IBM reports after today’s close. The big focus today is Intel, which reports after the close, along with Yahoo! and Motorola as well. Check the free Yahoo! Finance earnings calendar to check earnings dates of any other companies.

Today’s Watchlist:

UTH – Utilities HOLDR
Short

Trigger = below 112.45 (below the July 14 low)
Target = 108.05 (support of the 50-day MA and 50% Fibo retracement)
Stop = 114.70 (above 61.8% Fibo retracement of correction)

Notes = Although UTH is firmly established in a long-term uptrend, it has begun to show signs of a short-term top. Since the high volume selloff on July 14, it has consolidated at its lows, in a narrow range, and will likely break lower. When ETFs and stocks consolidate at their lows, it usually leads to new lows, just as bullish consolidation near the highs usually results in new highs. We are not looking to enter an intermediate-term trade as we did with SMH last month. Rather, we anticipate a quick hit on the short-side with an expected time horizon of only 2 to 7 days. Counter-trend trading must be done quickly and with very disciplined stops.

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 = + $624

FXI long (from July 14) –
bought 57.95, stop 55.70, target (new highs, will trail stop), unrealized points = (0.32), unrealized P/L = ($96)

Notes:

No changes to stops on open positions.

Edited by Deron Wagner,
MTG Founder and
Head Trader