The Wagner Daily | August 9, 2005

Commentary:

Many stocks sustained their third consecutive day of losses yesterday, but lighter turnover again indicated that the “smart money” was not aggressively selling. Unlike the prior two days in which the broad market started off on a negative note, the major indices gapped to open higher yesterday morning, but the enthusiasm quickly faded and the indices trended steadily lower throughout the day. The Nasdaq Composite Index dropped another 0.6% yesterday, bringing the index to a loss of 2.3% within the past three days. Losses were modest in the S&P 500 and Dow Jones Industrial Average indices, which closed lower by 0.3% and 0.2% respectively. Both the S&P 400 Mid-Cap Index and Russell 2000 Small-Cap Index lost 0.5%.

On a positive note, volume in both exchanges once again came in lower than the previous day’s levels. Total volume in the NYSE declined by 12%, while volume in the Nasdaq was 1% lower. Unlike most broad market corrections that are prone to at least a few days of higher volume “down” days, the major indices have yet to register a bearish “distribution day” since the short-term correction began on August 4. In fact, both the S&P 500 and Nasdaq Composite have had only one day of losses on higher volume within the past four weeks. By paying close attention to increases in volume that correlate to “up” or “down” days in the broad market, you can get a clear and accurate indication of what the institutional money is really doing. Whereas many technical indicators occasionally give false readings, volume is the one indicator that never lies. Furthermore, most technical indicators are “lagging” indicators, but volume is a “leading indicator.” Following the market’s price to volume relationship on a daily basis is akin to looking under the hood of a car to see whether the car just looks fast or is really packed with a powerful engine.

Yesterday saw further weakness in the Retail sector that helped push our short position in RTH (Retail HOLDR), which we entered August 5, further into the black. The Dow Jones Home Construction Index ($DJUSHB), which we pointed out as a short candidate in yesterday morning’s Wagner Daily, followed through on Monday’s 4.5% loss with another 3.3% drop yesterday. As mentioned, there is not an ETF that tracks the index, but trading a small basket of individual stocks is a good way to capitalize on sectors that lack corresponding ETFs. FYI, the Morpheus Capital hedge fund is currently short RYL and LEN, which are showing unrealized gains of 3.5 points and 2 points respectively. If not already short the Home Construction stocks, it may be a bit risky to enter at current levels, but a bounce or sideways retracement near the lows would present the next short entry points. When determining which stock(s) in that sector to short, those that are now trading below their 50-day moving averages are probably the best choices.

The Dow Jones Utilities Average ($DJU), which has been a strong market leader for several years, now appears to be forming a short-term top. The index is still well above support of its multi-year uptrend line on the weekly chart, but it just broke support of a steeper daily uptrend line that had been in place since the low of May 13. The chart of the $DJU index below illustrates this trendline break:

Because the index is still above support of its 50-day MA (the teal colored line), it may be tricky to short this index. But we at least wanted to give you an early heads up to the next sector that may potentially be poised for a reversal, at least in the short-term. The two main ETFs that track the Utilities are UTH (Utilities HOLDR) and XLU (S&P Utilities SPDR). We will be stalking both UTH and XLU for potential short entries over the next several days, depending on whether the sector continues to show relative weakness. As always, subscribers will be sent intraday e-mail alerts when/if we enter either ETF on the fly.

On the upside, we like the way the Semiconductor Index ($SOX) is acting, as the recent correction in the sector has been orderly and moderate. Although the index closed yesterday below its 20-day moving average, it is still more than 4% above support of its 50-day MA and is also holding firmly above support of its primary uptrend line. For those reasons, we expect the Semis to be among the first sectors to rally when the broad market bounces. We closed an 8% profit on half of our long position in SMH (Semiconductor HOLDR) last week, but remain long the second half of the position with a stop just below the daily uptrend line. The Biotech Index and BBH (Biotech HOLDR) have corrected sharply the last several days, but most individual leading stocks within the sector still look good on their daily and weekly charts. We’ll be watching to see how well the Biotechs act on the next broad market bounce and may consider re-entering BBH on the long side.

As for the broad-based ETFs, their short-term direction is likely to be determined by the market’s reaction to today’s FOMC meeting. At 2:15 pm EDT, the Feds are widely expected to raise the Fed Funds rate for the 10th straight time to a new rate of 3.5%. As always, the comments that accompany any rate hike are usually of more importance than the actual rate increase itself. Remember that the actual Fed commentary is irrelevant; rather, it is the market’s reaction to those comments that is of concern to technical traders. A knee-jerk reaction and high post-Fed volatility is probable, so take it easy with entering new positions today. We will take an updated look at the broad market’s support and resistance levels in tomorrow’s Wagner Daily, after we see the market’s reaction to Fed comments today.

Today’s Watchlist:

GLD – StreetTRACKS Gold Trust
Long

Trigger = above 43.69 (above yesterday’s high)
Target = 45.95 (resistance of the December 2004 high)
Stop = 42.55 (below 20 and 50-day MAs)
Shares = 800

Notes = GLD did not trigger yesterday, but we are still targeting it for entry today. Note the new trigger and stop prices above. Per our analysis in the August 4 issue of The Wagner Daily, the Gold and Silver index ($XAU) is now looking good on the weekly chart and we anticipate further upside. Although GLD does not necessarily move in lockstep with the $XAU index, it is now about to break out above its weekly downtrend as well. A breakout above last week’s high would break the downtrend that has been in place for eight months.

Daily Reality Report:

Below is Morpheus Trading Group’s daily
performance report of trades that were closed since the last newsletter, as well as an update on all open positions from The
Wagner Daily. Net P/L figures are based on the $50,000 Wagner Daily model account size.

Closed positions (since last report):

Open positions (coming into today):

unrealized P/L = + $281

RTH short (400 shares from Aug. 5) –
shorted 100.20, stop 102.25, target 96.40, unrealized points = + 0.81, unrealized P/L = + $324

EWA long (800 shares from Aug. 3) –
bought 18.36, stop 17.75, target of new highs (will trail stop), unrealized points = (0.02), unrealized P/L = ($16)

Current equity exposure ($100,000 max. buying power):

$59,932

Notes:

Click
here for glossary and explanation of terms used in The Wagner Daily

Click here to view MTG’s past performance results (updated monthly).

Edited by Deron Wagner,
MTG Founder and
Head Trader