The Wagner Daily | August 30, 2005

Commentary:

After beginning the day with an opening gap lower, the broad market quickly reversed and filled the gap, traded sideways for several hours, then pushed into positive territory in the afternoon. The Nasdaq Composite Index recovered 0.8% of its recent losses, while both the S&P 500 and Dow Jones Industrial Average advanced 0.6%. The S&P 400 Midcap Index gained 0.6% and the Russell 2000 Smallcap Index bounced 1% higher. Each of the major indices closed near their intraday highs as well. As predicted, it was strength in the biotech and semiconductor sectors that led the way higher in the broad market. The AMEX Biotechnology Index ($BTK) cruised 1.6% higher, while the Philly Semiconductor Index ($SOX) rallied 1.2%.

Although yesterday’s gains offered a glimmer of hope to the bulls, it was negative that the rally occurred on 2% lighter volume in the NYSE. Total volume in the Nasdaq was less than 1% higher than the previous day’s level. Given that it was the first solid reversal day since the broad market’s current selloff began in early August, it would have been better to see an accompanying rise in turnover. Such action would have indicated institutional support behind the rally, but this was not the case. Instead, yesterday’s action seemed more typical of just a technical bounce that was largely the result of some short covering here and there. The real question is whether or not the market follows through on yesterday’s gains. Doing so will surely require the return of institutional accumulation because a lot of overhead supply has been created from the recent losses.

Yesterday’s rally caused the Nasdaq to close right at resistance of its 50-day moving average, which it fell below three days prior. Obviously, all eyes will be watching that key area of resistance going into today’s session because a prompt recovery back above the 50-MA could pull the broad market higher as well. However, even if the index manages to close above the 50-MA today, resistance of the 20-day moving average looms overhead as well. The only major support level to follow, for each of the major indices, is yesterday’s lows. As such, you may want to stand back and wait for the market to show its next move over the next several days instead of aggressively entering new positions here. Doing so will prevent you from sitting through the volatility that usually occurs near pivotal support or resistance levels. We have circled the 50 and 20-day MAs on the chart of the Nasdaq below:

Both the S&P 500 and Dow Jones Industrials also have resistance of their 50-day moving averages overhead, although they could both rally another day before coming into those levels. Further, remember that the Dow is trading below its 200-day MA as well. This adds another very solid level of resistance that is important to watch. Below are daily charts of both indices:

Because of the obvious resistance levels in the broad market, we advise against buying any of the broad-based ETFs here, although it is a good idea to trail your stops lower if short them. On the long side, consider the Biotech (BBH) and Semiconductor (SMH) exchange traded funds, both of which have been showing relative strength to the broad market all month. As we have been discussing, sectors that don’t drop with the broad market are usually the first ones to rally when the major indices do. That is why the $BTK and $SOX indexes both outperformed the major indices by more than double. Beginning with BBH, you will see that it began to break out above a three-week sideways consolidation yesterday. We bought BBH a few days ago because we expected it would eventually break out, but the broad market weakness stopped us out with a small loss. Nevertheless, we would surely consider re-entering this ETF on the long side, as a break out of consolidations near the highs could easily lead to new multi-year highs here. Of course, this will only happen if the broad market cooperates a bit:

SMH has been trading sideways as the broad market sold off the past few weeks, so it’s not surprising that it bounced off support of its 50-day moving average yesterday:

If SMH clears the August 24 high of 37.12, we could see a nice upward move in this one. But your best bet overall is to remain positioned on both sides of the market, short the weak sectors and long the strong ones, until the market shows its hand from here.

Today’s Watchlist:

There are no new trade setups for today. Instead, we will focus on managing our existing positions for maximum profitability. Let’s see how the broad market acts near these 50-day MA resistance levels before trying to determine which side of the market to be on.

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):

unrealized P/L = + $186

MDY short (300 shares – half from Aug. 25, half from Aug. 26) –
shorted 128.40 (avg.), stop 129.40, target 123.20, unrealized points = (0.49), unrealized P/L = ($147)

Closed positions (since last report):

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

$60,342

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