The Wagner Daily | July 27, 2005

Commentary:

The major indices continued their recent patterns of consolidation, as the broad market meandered through another choppy and range-bound day. A 2.5% surge in the AMEX Biotech Index ($BTK) helped lift the Nasdaq Composite to a 0.4% gain yesterday, but weakness in the blue chips caused the Dow Jones Industrial Average to lose 0.2%. The S&P 500 managed a nominal 0.2% gain, the S&P 400 Mid-Cap Index moved 0.4% higher, and the Russell 2000 Small Cap Index gained 0.5%. In addition to strength in the Biotechs, other leading sectors were: Computer Networking ($NWX) + 2.3%, Disk Drives ($DDX) + 2.1%, and Semiconductors ($SOX) + 1%. Conversely, Oil ($XOI), Oil Service ($OSX), Pharmaceuticals ($DRG), Software ($GSO), and Broker-Dealers ($XBD) all showed losses, but each sector closed less than 1% lower.

Even though yesterday’s intraday action was indecisive, each of the major indices except the Dow Jones closed higher. More importantly, volume correspondingly picked up across the board. Total volume in the NYSE was 14% higher than the previous day, while volume in the Nasdaq increased by 12%. It would have been nice to see larger price gains to match the solid increase in turnover, but both the S&P and Nasdaq registered “accumulation days” nevertheless. The past five sessions have consisted of three winning days and two losing days in the broad market. Two of the three winning days occurred on higher volume, and one of the two losing days was on higher volume. Despite the indices having traded in a sideways range throughout the past week, analysis of volume patterns show a healthy market under the surface. Note that the broad market has only sold off on higher volume one day since July 6.

Although the broad market remains in a sideways range, the Semiconductor index closed at a new 52-week high yesterday. Since its April 15 low, the $SOX has rallied an impressive 25%! Due to major relative weakness in the S&P and Dow at the time, we felt it was high risk to aggressively buy semiconductor stocks or SMH (Semiconductor HOLDR) when the index began to rally sharply throughout May. However, a recovery in the broad market prompted us to enter SMH when the semis began to correct throughout June. After retracing only one-third of its 15% gain from its April low to its June high, the $SOX index blasted off to a new 52-week high in the beginning of July. Despite missing the first, and usually more risky, long entry in SMH during the month of May, we continue to hold our position that we bought on June 1. As of yesterday’s close, our SMH position is showing an 8% unrealized gain and is nearing our first price target of $38.85. If and when SMH rallies to that price, we plan on selling half of the position and raising the stop on the remaining shares. The first target of $38.85 is based on resistance of the prior weekly high from May 2004. The second target on the remaining shares is $44.90, which correlates to resistance of the multi-year high from January 2004.

In yesterday’s session, both the S&P 500 and Nasdaq Composite indices traded completely within their respective trading ranges of the previous day. The Dow Jones showed relative weakness and closed below the previous day’s low. Nevertheless, yesterday’s action did not change the technical picture of the broad market. Since both the S&P and Nasdaq had “inside days,” the short-term support and resistance levels we discussed in yesterday’s Wagner Daily remain the same. The Dow closed only a few points above its 10,576 support level, but still remains within its range as well. Rather than being redundant and pointing out the same support and resistance levels in today’s issue, click here if you wish to review the key support and resistance levels that mark the sideways range in the S&P, Nasdaq, and Dow.

Amazon.com reported quarterly earnings after the close and was trading 10% higher in the after-hours session. If the post-earnings enthusiasm remains, we could see strength in the Internet and other tech-related sectors today. However, earnings season continues to be in full swing and a negative report from any major company could just as easily change the market sentiment. As we have been saying, now is the time to focus on managing existing positions for maximum profitability rather than aggressively entering new positions during the erratic earnings announcement period.

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 = + $873

FXI long (from July 14) –
bought 57.95, new stop 58.50, target (new highs, will trail stop), unrealized points = + 2.57, unrealized P/L = + $771

UTH short (from July 20) –
short 112.67, stop 114.30, target 108.05, unrealized points = (0.35), unrealized P/L = ($35)

Notes:

We raised the stop on FXI.

Edited by Deron Wagner,
MTG Founder and
Head Trader