The Wagner Daily | August 1, 2005

Commentary:

The major indices broke out above their multi-week sideways ranges last Thursday, but just as quickly fell back down into their prior trading ranges on Friday. After trending lower throughout the morning session, the broad market attempted to rebound at 2:00 pm EDT, but the buying interest was short-lived and the indices drifted lower into the close. The S&P 500 Index lost 0.8%, while both the Nasdaq Composite and Dow Jones Industrial Average shed 0.6%. Each of the major indices closed near their intraday lows and also gave back all of their previous day’s gains and then some. Nevertheless, the broad market held up well throughout the last week of July. The Nasdaq Composite’s 0.2% gain for the week enabled the index to register an impressive 6.2% gain for the month. The S&P 500 gained less than 0.1% for the week, while the Dow was lower by the same percentage. Both indices moved 3.6% higher in July.

One of the more positive elements of last Friday’s action was that total market volume declined across the board. Volume in the NYSE and Nasdaq markets declined by 13% and 7% respectively. The lighter overall volume levels prevented Friday from becoming a bearish “distribution day,” which would have indicated institutional selling. Instead, the losses were more the result of a lack of buying interest rather than an abundance of selling. The pattern of higher volume on a majority of the “up” days with lighter volume on the “down” days continues to be intact. Both the Nasdaq Composite and S&P 500 have only seen two days of institutional distribution within the past four weeks, which indicates an overall healthy market “under the hood.”

In the July 28 issue of The Wagner Daily, we discussed how the 50-period moving average on the 60-minute chart often acts as a very reliable short-term support/resistance level for swing traders, especially with a market or stock that is trending steadily. Last Friday’s losses once again caused SPY (S&P 500 Index Tracking Stock) to drift back down to support of the 50-MA on the hourly chart. Looking at the hourly chart of SPY below, notice how the uptrend line from the July 18 low (the ascending blue line) converges neatly with the 50-period moving average (the pink line). This is a pivotal level to watch going into today’s session:

Because the 50-MA has been acting perfectly as support ever since July 18, our overall short-term market bias remains positive as long as SPY (and the S&P 500) hold above that uptrend line and 50-MA. Remember also that an intraday probe below the trendline or 50-MA does not count as a break of support. Only a closing price below those levels would warrant a possible change in our short-term broad market bias. Furthermore, there is a lot of support on the daily chart, so it is not advisable for swing traders to blindly short SPY even if the hourly chart begins to weaken. Specifically, note key support of the 20-day moving average is at $122.34, which also converges with support of the July 26 low (circled on the daily chart below):

Looking at the daily charts of QQQQ (Nasdaq 100 Index) and DIA (Dow Jones Industrial Average), resistance of the upper channel of their trading ranges has now become the highs of last week. Both ETFs also have clearly defined areas of horizontal price support as well. We have labeled these short-term areas of support on the daily charts below:

Both the Semiconductor (SMH) and Biotech (BBH) HOLDRS have been consolidating at their highs for the past two weeks. We netted a 15-point gain in our last BBH trade that was closed on July 17, but it may soon be time to re-enter the position again. We would ideally like to see a little more consolidation to enable the 20-day moving average to rise up and provide support, but we are nevertheless stalking BBH for a potential long entry on its next breakout over the $194 area. As for SMH, we remain long with a 7% unrealized gain from our June 1 entry and are patiently waiting for the next breakout to new highs. When that occurs, we will trail the SMH protective stops higher. At the present time, we do not see any industry sector ETFs that are short candidates with a positive risk/reward ratio.

Today’s Watchlist:

EWA – iShares Australia Index
Long

Trigger = above 18.35 (above high of weekly consolidation)
Target = new highs (will trail stop)
Stop = 17.75 (below low of last week’s consolidation)
Shares = 800

Notes = Just as we recently entered FXI (iShares China) on a breakout to a new high, we are looking to do the same with the ETF that tracks the Australian markets. The pattern on the weekly chart above is very bullish and we anticipate that EWA will break out to a new high in the coming week.

IMPORTANT NOTE TO SUBSCRIBERS – PLEASE READ:

Beginning today, August 1, the Wagner Daily position model will be modified for improved simplicity to traders who follow the portfolio. Instead of the former model that assigned each ETF a predetermined share size, the new model is simply based on a max. loss of $500 per trade. The size of the model account is also being increased to a cash value of $50,000, which means that each trade is limited to a maximum risk of 1% of equity. The share size listed in each trade corresponds to a maximum loss of $500 or less if the trade were to hit the predetermined stop price. More details about the new position model will follow via separate e-mail announcement in the coming week.

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 = + $554

Open Positions:

unrealized P/L = + $572

SMH long (from June 1) –
bought 34.82, stop 35.70, first target 38.85, then 44.90, unrealized points = + 2.54, unrealized P/L = + $762

Notes:

Per intraday e-mail alert, we sold HALF of the FXI position last Friday and raised the stop on the remaining shares. No changes to the sMH position.

Edited by Deron Wagner,
MTG Founder and
Head Trader