The Wagner Daily | August 11, 2005

Commentary:

Stocks opened on a higher note and trended higher throughout the morning session, but a negative reaction to tech giant Cisco’s earnings report weighed heavily on the Nasdaq all day. Relative weakness in the Nasdaq acted as an anchor on the S&P and Dow, which subsequently caused each of the major indices to reverse their trends in the afternoon and post losses on higher volume. Both the S&P 500 and Dow Jones Industrials lost only 0.2% yesterday, but the Nasdaq Composite slid 0.8%. The S&P 400 Mid-Cap Index eked out a 0.1% gain, while small cap stocks of the Russell 2000 closed lower by the same percentage.

More important than the bearish intraday price action of the broad market was that yesterday’s losses occurred on higher turnover. Total volume in the Nasdaq surged 24% yesterday, due largely in part to Cisco’s volume spike to 202 million shares. Volume in the NYSE was 9% higher than the previous day’s level. The broad market’s losses, combined with a strong uptick in volume, means that yesterday was a confirmed “distribution day” in both exchanges. Although the major indices have closed lower in three of the past four days, yesterday was the the first clear day of institutional selling since the widespread correction began on August 4.

FXI, which is the ETF that tracks China’s Xinhua 25 Index, once again blasted off to a new high and marked a 2.6% gain yesterday. Volume in FXI also spiked to 2.5 times its average level. A new high in the price of Crude Oil also fostered strength in OIH (Oil Service HOLDR), which gained 1.8% and closed at a fresh all-time high. As we have been anticipating, the Gold and Silver Index ($XAU) also showed strength and enabled GLD (Gold Trust) to move 0.8% higher. Most sector ETFs, however, closed flat to lower. RTH (Retail HOLDR) came within 25 cents of our stop when it rallied yesterday morning, but it sold off sharply in the afternoon and closed fractionally lower. SMH (Semiconductor HOLDR) hit our updated trailing stop of $37.10 yesterday, which locked in a gain of nearly 7% on the remaining shares.

Following a similar pattern of many sectors yesterday, UTH (Utilities HOLDR) opened higher and was showing a 1.5% gain at its morning high, but overhead supply from the recent selloff caused it to reverse and close only 0.1% higher. After coming into support of its 50-day moving average three days ago, UTH should have closed strong, but the less powerful 20-day MA acted as resistance instead. Many leading stocks within the Utilities sector are showing bearish chart formations as well, so we feel UTH is headed for a break down below support of its 50-day MA within the next week. As such, we shorted UTH at mid-day yesterday and sent an intraday e-mail alert to inform subscribers of the trade entry and stop price. If have been long the Utilities sector for any decent length of time, you are probably sitting on a healthy profit, but we recommend you tighten your stops to protect those gains in case of an intermediate-term trend reversal that would result from institutional sector rotation.

Yesterday morning’s broad-based rally attempt that failed in the afternoon caused the major indices to form some rather bearish looking candlestick patterns on their daily charts. The Dow Jones Industrial Average, for example, briefly broke out above its four-week trading range in the morning, but fell down a few hours later and closed back below its 20-day moving average. This puts the Dow back in the choppy area of “no man’s land,” but close to breaking below support of its 50 and 200-day moving averages. If the index does break support of these moving averages within the next few days, we will probably enter a new short position in DIA (Dow Jones Tracking Stock). The daily chart of the Dow below illustrates the failed breakout attempt and close proximity to the break of moving average support:

Like the Dow, the S&P 500 initially looked great yesterday morning, as the index had powered through resistance of its 20-day moving average and came to within only three points of last week’s highs. But unfortunately for the bulls, it too fell victim to the bears in the afternoon and finished the day back below its 20-day moving average. Worse is that the failed rally of the morning trapped the bulls who did not quickly sell when the index headed south in the afternoon. Sharp intraday reversals such as yesterday’s create overhead supply that makes it difficult for the market to gain any ground, even if it attempts to rally again the next day. Looking at the chart of the S&P below, notice the long “tail” or “wick” on yesterday’s candlestick that was created by the failed intraday rally attempt and subsequent reversal:

Going into yesterday, the Nasdaq had the best looking daily chart of the major indices, but that has changed now as well. While the S&P and Dow were rallying steadily throughout the first ninety minutes of the day, the Nasdaq failed to keep pace. Conversely, the index indicated relative weakness to both the S&P and Dow by merely trading sideways instead. When conditions deteriorated in the afternoon, the Nasdaq was the first index to drop and it also fell the hardest. The 0.8% loss in the Nasdaq caused the index to set a new 3-week low, but the index is also coming into support of its daily uptrend line that began with the low of April 29. Look for a test of this trendline support (the ascending blue line) within the next several days:

Because of the Nasdaq’s trendline support shown above, we do not yet recommend shorting QQQQ or other Nasdaq-related ETFs. However, the Dow and S&P may soon be primed for shorting. Remember the one thing that was causing us to maintain a bullish overall bias, despite negative price action, was that volume was coming in lower on each of the down day and rising on a majority of the up days. However, yesterday’s bearish action has caused us to shift to a neutral bias in the short-term. This means that your best bet is probably to allocate a higher cash position right now. If, however, you feel the need to stay in the market, consider positioning yourself on both sides of the market. The best way to do this is by shorting the sector ETFs and stocks that are showing the most relative weakness (Home Builders, Retail, Utilities, ) and buying those with relative strength (Chinese ADRs, Gold, Oil and Oil Service). The Morpheus Capital hedge fund now has an allocation of about 60% short and 40% long, but now is a time to be alert and ready to change gears at a moment’s notice.

Today’s Watchlist:

There are no “official” new positions today, as we are near our maximum buying power based on the model account size. However, advanced traders may consider shorting DIA if it breaks below the $105.10 area (this week’s low, 50 & 200-day moving averages).

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):

net P/L = + $339

GLD long (800 shares from August 10) –
bought 43.60, sold 43.53, points = (0.07), net P/L = ($72)

Open positions (coming into today):

unrealized P/L = + $152

UTH short (300 shares from Aug. 10) –
shorted 113.13, stop 115.30, target 107.80, unrealized points = + 0.75, unrealized P/L = + $225

RTH short (400 shares from Aug. 5) –
shorted 100.20, stop 102.25, target 96.40, unrealized points = (0.20), unrealized P/L = ($80)

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

$88,714

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