The Wagner Daily | August 23, 2005

Commentary:

The major indices surged higher out of the gates yesterday morning, but the bears took control after the first ninety minutes of trading and wiped out the early 0.7% gains in both the S&P 500 and Nasdaq Composite. By early afternoon, each of the major indices had fallen into negative territory, but moderate buying interest in the late afternoon reversed the broad market once again. It was quite a wild and indecisive session of intraday volatility, but the major indices eventually finished the day with small gains. The Nasdaq Composite gained 0.3%, the S&P 500 moved 0.2% higher, and the Dow Jones Industrials eked out a 0.1% gain. The tug-of-war between the bulls and bears caused each of the major indices to close near the middle of their intraday ranges. The Russell 2000 was the exception, as the small-cap index closed at its best level of the session and with a 0.8% gain.

Total volume in the NYSE was the same as the previous day’s level, but volume in the Nasdaq increased by 12%. The higher volume combined with the 0.3% gain in the Nasdaq to technically mark the session as a bullish “accumulation day.” However, because the prior day was the lightest volume day of the year, yesterday’s Nasdaq’s volume was still approximately 15% below its 50-day average level. The advancing/declining volume ratio in the broad market was positive in the morning, mixed throughout most of the session, then turned positive during the final thirty minutes of trading. In the Nasdaq, advancing volume exceeded declining volume by a ratio of 1.8 to 1. The adv/dec volume in the NYSE finished positive by a margin of 1.5 to 1. Despite indecision throughout most of the day, the strong internals during the last thirty minutes of the session points to at least marginal institutional support.

The primary weekly uptrend in the Semiconductor Index ($SOX) remains intact and the index also gained 1.1% yesterday, but its intraday action was not impressive. SMH (Semiconductor HOLDR) broke out above its daily downtrend line from the August 3 high yesterday morning, but immediately reversed and dropped back down to its opening low at mid-day. It recovered in the late afternoon and finished the day in the upper third of its intraday range, but its intraday action was certainly not healthy. When a stock or ETF that has corrected from a strong weekly uptrend finally reverses, it should be a rapid, firm reversal that marks the continuation of the primary trend. However, when a sector behaves as the $SOX and SMH did yesterday, it calls into question the validity of its recovery. The intraday chart of SMH below illustrates yesterday’s volatility and indecision. The dotted blue line marks yesterday’s opening price and the dotted red line marks the breakout price of the daily downtrend line:

SMH and the $SOX could still take off from here, but yesterday’s erratic action makes us cautious about re-entering SMH on the long side, especially given the light overall volume in the markets. We are, however, continuing to watch BBH (Biotech HOLDR) for possible re-entry point, as the ETF is consolidating at its highs on the weekly chart. Subscribers will be sent an intraday alert if/when we decide to enter BBH, as broad market conditions will be the primary determining factor.

In yesterday’s Wagner Daily, we illustrated how each of the major indices were clinging to key support of their 50-day moving averages after three prior sessions of narrow-range indecision. We also warned to be on the lookout for “stop hunts” that would easily occur from a quick probe below and reversal back above the 50-day moving averages. Not surprisingly, that is exactly what happened yesterday. The S&P 500, Nasdaq Composite, and Dow Jones Industrials were each trading below their 50-day moving averages at their afternoon lows, but all three indices recovered to close just above their 50-day MAs. Yesterday’s session was much more volatile than those in the latter half of last week, but the indices once again finished near the middle of their intraday ranges and just above support of their 50-day MAs. Therefore, the technical situation remains the same going into today, as does our short-term advice — don’t overtrade the current market or you will surely get chopped up. SOH (“sitting on hands”) mode will likely be more profitable for you than attempting to trade the broad market ETFs in the short-term. If you must trade, focus on the specific industry sector ETFs that are showing relative strength or weakness to the broad-based ETFs.

Today’s Watchlist:

Due to indecisive and erratic broad market conditions, there are no new “official” plays for today. We are considering a long entry in BBH, but will send an intraday alert with trade details if/when we buy it. We don’t want to list details for the trade setup without first evaluating today’s overall market conditions.

Daily Reality Report:

Below is an overview of all open positions, as well as a performance report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on the $50,000 Wagner Daily model account size. Changes to open positions since the previous report are listed in red text below:

Open positions (coming into today):

split stop: half at 98.79, half at 100.8

unrealized P/L = + $972

UTH short (150 shares from Aug. 10 – also see “Notes” section below) –
shorted 113.13, stop 114.25, target 107.80, unrealized points = + 0.17, unrealized P/L = + $26

Closed positions (since last report):

net P/L = + $200

SMH long (500 shares from Aug. 22) –
bought 36.70, sold 36.59, points = (0.11), net P/L = ($65)

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

$56,080

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