The Wagner Daily | August 12, 2005

Commentary:

It was a volatile and indecisive session that resembled a roller coaster ride, but the major indices closed higher across the board yesterday. The broad market initially brushed off Wednesday’s bearish reversal day by recovering all of the previous day’s losses, but overhead supply from the recently trapped bulls caused stocks to slide back down to their opening levels. Buyers returned in the final hour of trading and lifted the major indices to close near their morning highs. The S&P 500 Index gained 0.7%, the Nasdaq Composite moved 0.8% higher, and the Dow Jones Industrial Average was up 0.9%. Both the S&P 400 Mid-Cap Index and Russell 2000 Small-Cap Index kept pace with the broad market and posted gains of 0.7% and 0.9% respectively. Although the stock market posted solid gains, a quick look at the intraday chart of the S&P 500 below shows yesterday was really a tug-of-war between the bulls and bears:

Unfortunately for the bulls, volume was the one thing that was sorely lacking from yesterday’s rebound. Total volume in the Nasdaq declined by 14%, while volume in the NYSE was 7% lower than the previous day’s level. Considering that Wednesday was a “distribution day” in which stocks sold off on higher volume, it is not good that the recovery attempt occurred without a corresponding rise in turnover. In the four weeks that preceded August 10, a majority of the market’s “up” days were on higher volume, while only one of the “down” days was on higher volume. Such action is the recipe for a healthy market, but Wednesday’s drop on higher volume combined with yesterday’s bounce on much lighter volume may be serving as an early warning sign to astute traders and investors. It is definitely too early to suggest the market has formed an intermediate-term top, but remember that key changes in volume levels often precede changes in price. Traders who closely follow price action of the major indices but ignore changes in volume patterns often pay a steep price for their error.

As for individual sectors, Gold stocks really shined yesterday! The Philly Gold and Silver Index ($XAU) rocketed 4.1% higher yesterday, as many mining stocks broke out of long bases of consolidation. We have been talking about strength in $XAU ever since the index broke out above its 200-day moving average on August 3. In the five sessions that followed, $XAU retraced about half of its initial breakout, but then blasted off above the August 3 high yesterday. The chart below illustrates this:

GLD, which is the ETF that tracks the price of Spot Gold, gained 2.1% yesterday and also closed at a new high of the calendar year. Although we scratched our initial entry in GLD yesterday, we will probably re-enter if it trades in a bullish consolidation pattern from here. Both the Oil ($XOI) and Oil Service ($OSX) sectors continued to show relative strength, as both sectors again closed at new record highs. Most of the other sectors turned in a mixed performance of being within 1% of unchanged levels. On the international front, EWA (iShares Australia) rallied 2% and set a fresh all-time high yesterday. Our long position in EWA is now showing a 3.1% gain since our entry on August 3.

Yesterday’s erratic intraday action caused each of the major indices to close within their trading ranges of the previous day. As such, the technical picture for the broad market has not really changed since our detailed analysis of the S&P, Nasdaq, and Dow in yesterday’s Wagner Daily. The broad-based ETFs and indexes are now in “no man’s land,” which means they are stuck in the middle of pivotal support and resistance levels. You may wish to review yesterday’s newsletter for a quick look at where these support and resistance levels are, as it is not wise to aggressively enter new positions on either side of the market until the broad market resolves itself. Remember that patient and disciplined traders are consistently profitable because they wait for the perfect trade setups to come to them, rather than forcing them to happen. This is the reason why professional traders often spend more time out of the markets than in the markets.

Dell Computer (DELL) and a handful of other tech companies reported quarterly earnings after the close yesterday. The initial reaction to Dell’s report resulted in an 8% drop in the after-hours session, which also dragged the Nasdaq futures lower after the close as well. Just as Cisco’s negative report hurt the Nasdaq on Wednesday, the index could again see pressure today. Honor your stops and always trade what you see, not what you think!

Today’s Watchlist:

There are no new “official” trade setups today, as we are near our maximum buying power based on the model account size. GLD looks great.

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 = + $456

UTH short (300 shares from Aug. 10) –
shorted 113.13, stop 115.30, target 107.80, unrealized points = + 0.05, unrealized P/L = + $15

RTH short (400 shares from Aug. 5) –
shorted 100.20, stop 102.25, target 96.40, unrealized points = (0.10), unrealized P/L = ($40)

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

$89,188

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