The Wagner Daily | July 28, 2005

Commentary:

Stocks chopped around in a narrow range throughout the first half of the day, but the bulls arrived during the final two hours of the session and lifted the major indices. The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average each gained 0.5% and also closed near their respective intraday highs. Small and mid-cap stocks that have been leading the broad market rally throughout the past several months lagged behind. The S&P 400 Mid-Cap Index gained 0.2% and the Russell 2000 Small-Cap Index closed less than 0.1% higher. Semiconductor stocks took a breather from their strong uptrend, as the $SOX index corrected by 0.7%. Many pharmaceutical stocks, on the other hand, reversed sharply from their recent weakness. The AMEX Pharmaceutical Index ($DRG) rallied 1.4%. The Internet Index ($GIN) gained more than 2%, due largely in part to a strong performance from Amazon.com.

Volume in the Nasdaq increased by 6% yesterday, but total volume in the NYSE was 2% lower than the previous day’s level. This means that it was a bullish “accumulation day” in the Nasdaq, but the S&P and Dow climbed on lighter volume. Regardless, the positive price to volume relationship of the broad market continues. There has only been one confirmed “distribution day” in the broad market since July 6, and a majority of the up days have been on higher volume. Such a pattern is always the hallmark of institutional buying.

Yesterday’s gain in the S&P 500 caused the index to close at a new 4-year high, although it did not clear the prior intraday high of July 25. Below is a 60-minute intraday chart of SPY (S&P 500 Index) that illustrates how the index popped its head above resistance of its recent trading range:

Although the S&P 500 Index and SPY set fresh closing highs, a breakout of the sideways trading range technically has not yet been confirmed. Only a close above the July 25 intraday high of 1,238 would confirm the breakout. An increase in volume would also help to confirm a breakout as well. Conversely, notice how the 50-period moving average (the pink line) has acted perfectly as support throughout the past seven days. When swing trading with a time-frame of two to seven days, the 50-period moving average on the 60-minute chart often acts as firm support in uptrending stocks, ETFs, and indices. As such, many traders find that trailing a stop just below support of this moving average is a profitable and simple system for maximizing gains.

When trailing a stop on a long position using moving averages, be sure to place your stop far enough below obvious support levels so that you do not get “shaken out” in the event of a “stop hunt.” We like to place stops a minimum of 15 to 20 cents below moving averages (often more). Looking at the chart above, notice how SPY probed below its 50-period moving average on July 21, but only by 14 cents. Too tight a stop would have caused you to sell your position at the low. While intraday moving averages work well in markets that are trending in the short-term, it is important to note that they do not work well in markets or stocks that are choppy or range bound in the intermediate-term. Moving averages are much more effective as support and resistance levels in stocks and ETFs that are steadily trending in either direction.

In addition to SPY and the S&P 500, the Nasdaq 100 Index (and QQQQ) also broke out and closed at a new high yesterday. But unlike the S&P, the Nasdaq 100 also closed above the prior intraday high of its trading range. Below is a 60-minute intraday chart of QQQQ that illustrates the breakout. Again, notice how the 50-period moving average acted perfectly as support yesterday morning:

Despite a breakout in the Nasdaq 100 Index, note that the broader-based Nasdaq Composite did not yet break out of its range. A close above 2,189 would represent a new closing high, while a close above 2,194 would put the Composite index above its prior intraday high from July 21. As for the Dow Jones Industrials, that index remains a choppy, sloppy mess that continues to show relative weakness to both the S&P and Nasdaq. On the 60-minute chart of DIA (Dow Jones Indu. Avg.) below, notice how the index has not only failed to break out of its range, but has also been very indecisive and erratic since July 14. The crossover of the 20 and 50-period moving averages confirms the choppiness:

Due to the lack of direction in the Dow, we recommend you avoid trading in DIA right now. Focus on the tech-related ETFs and stocks instead. Semiconductors and Biotechs, although subject to correcting in the short-term, have very strong intermediate-term trends established. A retracement down to support of the 20-day moving averages in BBH or SMH provides a low-risk entry point on the long side (although we are already long SMH from June 1). In addition to SMH, we continue to hold our long position in FXI, which is now showing an unrealized gain of 5.9% since our July 14 entry. We also remain short UTH, which is less than 1% against us. As for new ETF trades, we are waiting for the passing of earnings season because we prefer to avoid the additional volatility. We will probably enter new positions in the beginning of August, but will focus on managing our existing portfolio for now.

Today’s Watchlist:

There are no new plays for today, as we now have three open positions (SMH and FXI long, UTH short). See commentary above for more about strategy for new trade entries.

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 = + $1,026

SMH long (from June 1) –
bought 34.82, stop 34.60, first target 38.85, then 44.90, unrealized points = + 2.47, unrealized P/L = + $741

UTH short (from July 20) –
short 112.67, stop 114.30, target 108.05, unrealized points = (0.85), unrealized P/L = ($85)

Notes:

We may sell half of the FXI position into strength today, rather than trailing a tighter stop. As usual, MTG will send an intraday e-mail alert if/when we sell.

Edited by Deron Wagner,
MTG Founder and
Head Trader