The Wagner Daily | August 22, 2005

Commentary:

The S&P 500 and Nasdaq Composite closed near unchanged levels for the third consecutive day, as the light volume of the “summer doldrums” kept a lid on any major movements in the latter half of last week. Both the S&P 500 Index and the Dow Jones Industrial Average gained less than 0.1%, while the Nasdaq Composite Index closed less than 0.1% lower. The S&P 400 Mid-Cap Index and the Russell 2000 Small-Cap Index each gained 0.2%. Like the prior two days, the major indices gave up early gains and closed near their intraday lows. Such action generally shows a lack of institutional support, which, if present, usually becomes apparent during the final ninety minutes of each trading session. For the week, the S&P 500 lost 0.9% and the Dow dropped 0.4%. The Nasdaq Composite shed 1%, marking its third straight week of losses.

Total volume in the Nasdaq dropped 13% last Friday, while volume in the NYSE was 14% lighter than the previous day’s level. Volume came in well below average levels in both exchanges, and it was also the lightest volume day of the year in the Nasdaq. Turnover in the Nasdaq was below its 50-day average level every day of last week, while the NYSE volume exceeded its average level only one day. This, of course, confirms that many traders and investors are more interested in enjoying their annual summer holidays than buying and selling stocks right now. It is likely this trend will continue at least through the coming week, perhaps even for the next two weeks, through the Labor Day weekend.

The S&P 500, Nasdaq Composite, and Dow Jones Industrials each spent the latter half of last week clinging to support of their 50-day moving averages, a level that is closely watched by institutions in order to determine the intermediate-term trend of the major indices. Unfortunately, however, the volatility contraction of the past three days makes it obvious that traders are not yet willing to place any bets on whether or not the primary uptrends will resume. We may need to wait longer for some type of resolution because the second half of August is seasonally one of the slowest times of the year. Note the tight ranges and close proximity of the 50-day moving averages on the daily charts below:

Although it may not be very exciting, remaining in SOH (“sitting on hands”) mode is probably your safest bet at the present time. It is always less costly and more profitable to let the market determine its direction and follow along, rather than attempting to predict its next move and buying or selling short ahead of an actual move. Light overall volume in the markets makes it even more difficult to predict whether the major indices will bounce off their 50-day moving averages or break their primary uptrends.

As for specific industry sectors, keep an eye on both the Semiconductor (SMH) and Biotech (BBH) exchange traded funds over the next few days. SMH is sitting on support of its weekly uptrend and is poised to break its daily downtrend. Trigger, stop, and target prices for this long setup are provided to subscribers below. BBH also looks good on the long side, as it has been correcting on the daily chart, but the weekly chart still shows a bullish consolidation near the highs. As for weak sectors, we remain short RTH (Retail), which is now showing an unrealized gain of 2.45 points since our entry. We will continue to trail a stop lower towards our downside price target. We locked in a small gain on half of our UTH short position when it hit the trailing stop last Friday, but we remain short the second half of the position.

Resolution to the indecision in the broad market will eventually come, and the move is likely to be rapid and swift when it finally does occur. However, be aware of light volume shakeouts and “stop hunts” on both sides of the 50-day moving averages in the coming week. Specialists and market makers are keenly aware that many traders and retail investors place protective stops near the 50-day moving averages, and they would love nothing more than to grab those shares and immediately reverse the trend. The best way to prevent yourself from falling victim to a “stop hunt” is to use wider stops than would appear obvious. Reducing your share size while using wider stops enables you to risk the same dollar amount of capital, but have a greater chance of remaining in the trade. Even better, remain on the sidelines until the market shows its hand in the coming weeks. Don’t overtrade your account in this market! Most importantly, consider keeping cash available so that you can quickly profit from a sharp move in either direction that will eventually come.

Today’s Watchlist:

SMH – Semiconductor HOLDR
Long

Trigger = above 36.69 (above daily downtrend line)
Target = 38.30 (resistance of Aug. 2 high)
Stop = 36.10 (below Friday’s low)
Shares = 500

Notes = This setup from last Friday did not yet trigger, but we still like the setup and are targeting SMH for entry today. Note the new trigger price, stop, and share size above. SMH has come into support of its primary uptrend line on the weekly chart, and is also now poised for entry on the daily chart (above). We are prepared to buy a resumption of the uptrend, but our target is only the prior high from August 2. Therefore, the stop is correspondingly tight as well. As always, the trigger price for entry is important, because we don’t want to “jump the gun” by anticipating a resumption of the trend without first having confirmation.

Daily Reality Report:

Below is Morpheus Trading Group’s daily
performance report of trades that were closed since the last newsletter, as well 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 = + $119

Open positions (coming into today):

unrealized P/L = + $980

UTH short (150 shares from Aug. 10) –
shorted 113.13, stop 114.25, target 107.80, unrealized points = + 0.84, unrealized P/L = + $126

EWA long (800 shares from Aug. 3) –
bought 18.36, stop 18.13, target of new highs (will trail stop), unrealized points = (0.02), unrealized P/L = ($16)

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

$70,616

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