The Wagner Daily | August 16, 2005

Commentary:

As anticipated, the Nasdaq Composite bounced off support of its weekly uptrend line and pulled the broad market into positive territory along with it, but low volume levels across the board failed to confirm the rally. After a sluggish start in the morning, the major indices rallied at mid-day, then drifted modestly lower throughout the rest of the session. The Nasdaq Composite posted a 0.5% gain, while both the S&P 500 and Dow Jones Industrial Average moved 0.3% higher. The Russell 2000 Small-Cap Index showed relative strength after last week’s correction and rallied 0.9%. The mid-cap stocks of the S&P 400 gained only 0.2%.

Total volume in the NYSE exchange fell 18% to 1.2 billion shares, its lightest day of volume since the pre-holiday session of May 27. In the Nasdaq, volume similarly was 16% below the previous day’s level. Yesterday was the third day the Nasdaq has gained since August 3, but volume has declined in each of those three days. Conversely, volume increased in three of the five “down” days during that same period. Such a price to volume relationship is not positive for the markets, but don’t forget that we are smack in the middle of the annual “summer doldrums.” The latter half of August is typically when a majority of traders and investors take their summer vacations, so it was not surprising that volume over the past several days has been below average levels. Most likely, turnover will remain below average from now through the Labor Day holiday on September 5.

The Semiconductor Index ($SOX), which gained 1.1%, was among the leading industry sectors yesterday. The Computer Hardware Index ($HWI) also moved 1.7% higher. On the downside, the Gold Index ($GOX) and Oil Service Index ($OSX), two recent market-leading sectors, both corrected by 1.1%. Lethargic volume resulted in a mixed performance for most of the other sectors, as a majority closed near unchanged levels.

Looking at the daily chart of the major indices, the first thing you will notice is that the Nasdaq Composite perfectly bounced off support of its three and a half month uptrend line yesterday. The blue ascending line on the daily chart below marks the lower channel support of the uptrend that began with the low of April 29:

While the rally off its uptrend line was positive, the Nasdaq’s gain was rather minimal, thanks in large part to the light volume. Resistance of the 20-day moving average, combined with seasonal lack of activity, makes it likely that choppy and indecisive action over the next week is more probable than a quick and firm rally back above the 2,200 level to new highs. Nevertheless, the Nasdaq remains healthy in the intermediate-term as long as it holds above its 50-day moving average.

From a technical point of view, yesterday’s rally in the S&P and Dow did not change anything. Both indices remain stuck in the middle of a choppy, sideways range near their 20-day moving averages. We have drawn horizontal lines on the daily charts below to mark the short-term support and resistance levels that we are watching for a break out of their current ranges:

As long as the S&P and Dow remain confined to their ranges illustrated above, we recommend avoiding trades in SPY and DIA because you are likely to churn your account with small losses. Instead, focus on sector ETFs that are showing relative strength or weakness to the broad market because their trends will be more clearly defined. SMH (Semiconductor) continues to act well, as it is holding above support of both its weekly uptrend line and 50-day moving average. BBH (Biotech) is another candidate for long entry, as it is consolidating near its four-year high. GLD (Gold Trust), although it gaps a lot, still appears to be breaking out on its weekly chart. On the short side, we continue to like both RTH (Retail) and UTH (Utilities), both of which we remain short because they appear to be correcting in the short-term due to sector rotation. We also like the Home Construction sector on the short side, although there is not an ETF that comprises that sector. Within this sector, the Morpheus Capital hedge fund remains short RYL, LEN, and PHM, with stops above their 20-day moving averages. Above all, don’t forget that cash is king, especially when very light volume levels cause erratic and indecisive moves in the broad market. 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. Trade ideas are in last paragraph above if interested in “self-serve” setups.

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 = + $384

UTH short (300 shares from Aug. 10) –
shorted 113.13, stop 115.30, target 107.80, unrealized points = (0.09), unrealized P/L = ($27)

RTH short (400 shares from Aug. 5) –
shorted 100.20, stop 102.25, target 96.40, unrealized points = (0.86), unrealized P/L = ($344)

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

$89,462

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