The Wagner Daily | July 22, 2005

Commentary:

The broad market failed to follow up Wednesday’s bullish reversal, as the major indices sold off on higher volume yesterday. Positive news of China’s move to revalue its currency, combined with reports of another bombing in London, created indecisive and choppy intraday market action, but the bears eventually won the tug-of-war. The S&P 500 Index lost 0.7%, while the Dow Jones Industrial Average slid 0.6%. The Nasdaq Composite continued to show relative strength, but still closed 0.5% lower. The Nasdaq-100 Index, which is more heavily concentrated in tech stocks than the Nasdaq Composite, lost only 0.1%. The S&P 400 Mid-Cap Index and Russell 2000 Small-Cap Index, both of which closed at record highs in each of the prior two days, each gave back all of their prior day’s gains and then some. The S&P 400 lost 1.0% and the Russell 2000 shed 1.5%. Of the “big 3” broad-based indices, only the Nasdaq Composite held on to a portion of its gains from the previous day.

Total market volume came in higher across the board yesterday, causing both the S&P and Nasdaq to sustain a bearish “distribution day.” Despite the prior day’s surge to its highest level since June 24, volume in the Nasdaq was 4% higher. Volume in the NYSE rose 6% above the prior day’s level. Although it is never positive to see an increase in volume when the markets close lower, it is important to note that yesterday was the first “distribution day” in either exchange since July 6. Given how far the major indices have rallied in such a short period of time, it was not surprising to see a bit of institutional “profit taking” into strength. A healthy market can typically absorb one or two days of distribution, but a string of three or more “distribution days” within a two-week period could indicate an intermediate-term top.

In a long-awaited move, China announced yesterday morning that it has begun taking steps to revalue the Yuan (its currency) in order to engage more fairly in international trade. As one would expect, the news garnered a positive reaction in nearly every Chinese ADR that trades in the U.S. markets. This worked out great for our long position in FXI (iShares Xinhua China 25 Index), which rallied steadily to a closing gain of 3.6% yesterday. More importantly, FXI closed at an all-time high on nearly 7 times its average daily volume! Such a huge increase in volume is always the footprint of institutional buying activity. Note the volume surge on the daily chart of FXI below:

We bought FXI back on July 14 because it was poised to breakout to a new record high after consolidating during the two weeks prior. After entering FXI, it traded sideways for two more days, then rallied to set a new high on July 19. It gapped higher the following day, held on to its gains, then exploded yesterday. We have trailed the stop higher in FXI because we now have a 4.7% profit buffer on the position. For your information, click here to learn which individual Chinese stocks comprise FXI.

Obviously, the news of China’s currency revaluation had a direct impact on yesterday’s performance in FXI, but the point is that the trade was a quality setup before yesterday’s news was released. Tight consolidations near 52-week highs are bullish and often result in explosive moves to the upside. As you may recall, this was the same reason we bought BBH back on June 16, two weeks before it blasted off and ran 20 points higher. Be aware, however, that consolidations near the highs have a higher breakout failure rate during overall weak or downtrending markets.

Because FXI is a member of the iShares family of exchange traded funds, you may be interested to know that Barclays Global Investors will soon be transferring primary listings of 81 of its iShares ETFs that currently sit at the American Stock Exchange to the New York Stock Exchange and the Archipelago Exchange. Those of you who trade ETFs will surely agree this is good news because of the additional order routing options and better price fills that are generally available on the NYSE. Check out the iShares web site to learn more about this change.

Not surprisingly, the January 3 intraday high in the Nasdaq Composite acted as resistance in yesterday’s session. The Nasdaq opened at that prior high of 2,191 in the morning, drifted lower, rallied two points above it at mid-day, then sold off in the afternoon. The Nasdaq subsequently finished the day at its prior 52-week closing high of 2,178 that was set on December 30. Thus far, the Nasdaq has only been able to close above its prior 52-week high for one day. As such, the area of price resistance from last December and early January could become a significant and pivotal area of resistance in the short-term. Support on the Nasdaq should be found at the July 18 low of 2,144. The S&P 500 has support at 1,221 to 1,225 and resistance around 1,235.

We discussed the above as a likely scenario in yesterday’s newsletter, which is the reason we also suggested that subscribers either take profits on winning long positions or tighten their stops. Nevertheless, a week of sideways to lower price action in the broad market would actually be healthy. All markets eventually need time to digest their gains in order to build momentum for the next rally. The key to success in uptrending markets, of course, is entering new positions during times of consolidation or retracement, then selling into strength or trailing tight stops when upside momentum begins to falter. We attempt to help subscribers with the timing of such via the broad market technical analysis we provide each day in The Wagner Daily.

The earnings reports are flying, so expect continued market volatility throughout the next one to two weeks. As such, use caution entering any new positions today. Check the free Yahoo! Finance earnings calendar to check earnings dates of any companies.

Today’s Watchlist:

There are no new plays for today, as we now have three open positions (SMH and FXI long, UTH 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. 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 = + $831

SMH long (from June 1) –
bought 34.82, stop 34.60, first target 38.85, then 44.90, unrealized points = + 2.29, unrealized P/L = + $687

UTH short (from July 20) –
short 112.67, new stop 114.30, target 108.05, unrealized points = + 0.87, unrealized P/L = + $87

Notes:

We have tightened the stops on both FXI and UTH.

Edited by Deron Wagner,
MTG Founder and
Head Trader