The Wagner Daily | August 29, 2005

Commentary:

Last Thursday’s broad market consolidation near the lows followed through to the downside on Friday, as each of the major indices continued to extend their recent downtrends. Both the S&P 500 and Nasdaq Composite slid 0.6%, while the Dow Jones Industrials lost 0.5%. Small and mid-cap stocks, which were top performers during the previous uptrend, showed the most relative weakness on Friday. The S&P 400 Midcap Index dropped 0.9% and the Russell 2000 plummeted 1.4%. The broad market attempted to rally ninety minutes before Friday’s close, but stocks were immediately met by the overhead supply of sellers. Each of the major indices closed at their intraday lows, as well as their lows of the week. The S&P 500 declined 1.2% for the week and the Dow Jones dropped 1.5%, but the Nasdaq Composite only lost 0.7%. However, the Nasdaq sustained its fourth consecutive week of losses.

Total volume in the NYSE increased by 8% last Friday, but volume in the Nasdaq came in 3% lighter than the previous day’s level. The rise in turnover combined with the losses caused both the S&P and Nasdaq to register another bearish “distribution day.” But it was positive that volume in the Nasdaq declined marginally. Within the past four weeks, both the S&P and Nasdaq have had four days of confirmed institutional selling, but there were many more days of bearish “churning” that results from higher volume without a significant gain in prices. “Churning” days, as we have mentioned in the past, often precede the more obvious “distribution days.”

In the August 25 issue of The Wagner Daily, we provided subscribers with a short setup in MDY, the ETF that tracks the S&P 400 Midcap Index. Half of the short position hit our trigger price for entry on on the 25th and the remaining half position triggered on the 26th. It would have been risky to short MDY prior to last week, but now it has fallen below its 50-day moving average after consolidating in a narrow range for six days. The daily chart of MDY below illustrates Friday’s break of support, as well as our profit target on the short position:

Not only did MDY break below its 50-day moving average, but it also closed Friday below the intraday low of August 18. The consolidation of the previous six days, along with the 50-day moving average, should now act as resistance on any rally attempt. As such, we now expect MDY to fall to its next major support of the July 7 low, around the 125.32 level, before attempting to bounce significantly. Below that, the next support is the June 27 low around 123.17. The dotted blue lines on the chart above illustrate the areas of horizontal price support. Our average price on the short position in MDY is 128.40, which gives us a current profit buffer of nearly one point. Now we will simply continue trailing a stop lower to protect gains and maximize profits. As always, we will keep subscribers updated on changes as they are made.

ICF (iShares REIT) dropped nicely on Friday and appears to be headed down to the neckline of the head and shoulders pattern we discussed on Friday. Moving lower with the REITs are the home construction stocks, which we have talked about numerous times within the past several weeks. Many stocks within the home construction index ($DJUSHB) are breaking below uptrend lines that have been in place for several years, so it’s probably a good idea to remain short that sector. Trading in ICF and IYR should be similar, although they focus more on commercial real estate. Conversely, both the Biotechs ($BTK) and Semiconductors ($SOX) are still showing relative strength to the broad market and will likely be the first sectors to rally when the market bounces. BBH was weak on Friday morning, but reversed to close near unchanged. It is still holding up within the narrow range consolidation near the highs. SMH is also demonstrating similar strength and is just above support of its 50-day MA now.

As for the broad-based ETFs, our advice remains the same as last week. Relative strength in the Biotechs and Semis are helping to hold up QQQQ, so we do not recommend shorting this one (nor buying it for that matter). DIA (Dow Jones), which we analyzed a few days ago, is following through nicely to the downside and is on its way down to support of the June lows, about one point lower. Similarly, SPY (S&P 500) is nearing support of its 200-day moving average one point below Friday’s close. Both SPY and DIA can be shorted, but you’re probably a bit late to be entering new positions in them if not already short. However, both MDY and IWM (iShares Russell 2000) cracked their support levels on Friday and have much further to fall. This means that these ETFs offer a better risk/reward ratio than shorting SPY or DIA.

Today’s Watchlist:

There are no new trade setups for today. Instead, we will focus on managing our existing positions for maximum profitability.

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):

stop 129.40

unrealized P/L = + $243

ICF short (300 shares from Aug. 26) –
shorted 72.87, stop 74.75, target 69.80, unrealized points = + 0.28, unrealized P/L = + $84

Closed positions (since last report):

net P/L = ($217)

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

$60,054

Notes:

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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