The Wagner Daily | September 2, 2005

Commentary:

The stock markets followed up Wednesday afternoon’s bullish reversal with a choppy session that left the major indices with mixed results near unchanged levels. The S&P 500 eked out a 0.1% gain, but both the Nasdaq Composite and Dow Jones Industrials lost 0.2%. The Russell 2000 Index advanced 0.3%, indicating that small caps again led the broad market. The S&P 400 Midcap Index, however, was unchanged. Each of the major indices closed near the middle of their intraday ranges, a typical sign of overall indecision.

Total market volume in the NYSE declined by 6% yesterday, while volume in the Nasdaq was 3% lighter than the previous day. Although turnover was lower, volume levels in both exchanges still came in above average levels because the prior day’s volume had spiked so high. Yesterday was technically not a “distribution day,” but we view the higher than average volume as a negative. Trading activity should usually decline during a session of consolidation that followed a high volume bullish reversal day. If volume levels remain nearly the same but no upward price movement occurs, it signals “churning,” which often disguises institutional selling into strength.

Yesterday’s industry sector performance was interesting. The Gold Index ($GOX) rocketed 4% higher yesterday, as a handful of gold stocks like RGLD and GG broke out to new 52-week highs. GLD (StreetTRACKS Gold Trust), which we targeted for long entry a few weeks ago but never entered, is now back on our radar for long entry. Subscribers can see details of that trade setup on “Today’s Watchlist” below. The Oil Index ($XOI) also spurted another 3.6% higher and closed at a fresh all-time high for the second day in a row. Although oil-related stocks technically have been very strong as of late, we have intentionally avoided trading in OIH (Oil Service HOLDR) simply because that sector is now being driven largely by news, particularly speculation on the effects of Hurricane Katrina. The DJ Utilities Average ($DJU) similarly cruised 2.1% higher. On the downside, the Airline Index ($XAL) plummeted 5.8%, a typical inverse reaction to upward movements in the Oil Index. The Retail Index ($RLX) lost 1.1%, due largely to weakness in the apparel retailers. RTH (Retail HOLDR), which we shorted and covered for a nice profit last week, is now firmly below its 200-day moving average.

In yesterday’s Wagner Daily, we analyzed and compared the relative strength of the Biotech versus the Semiconductor indexes and came to the conclusion that buying BBH (Biotech HOLDR) was a better trade than SMH (Semiconductor HOLDR). Given that BBH gained 1.1% yesterday while SMH lost 1.1%, it seems our analysis may be correct. Since BBH is now showing an unrealized gain of more than 5 points since our initial long entry two days ago, it gives us a nice profit buffer to trail a loose stop. We looked at the longer-term weekly charts of both BBH and SMH yesterday that showed how each one had come into support of its weekly uptrend line, but the shorter-term daily charts show a big difference in their recent relative strength:

As you can see, BBH is now free of overhead supply and resistance because it broke out and closed at a new 4-year high yesterday. SMH, on the other hand, failed to break out above resistance of its multi-week range, just above the $37 level. It closed a few cents below its 20-day moving average and only 24 cents above its 50-day MA. Within the past week, SMH bounced off its 50-day MA on three separate days, but it failed to gain any ground after doing so. Therefore, if it doesn’t break out within the next few days, it could easily break below its 50-day MA. Because the Semis are so heavily weighted, weakness in that sector would probably weigh heavily on the Nasdaq. It would even make it more difficult for the Biotechs to gain ground, although they probably would not drop much. SMH is holding the consolidation and could still take off, but, if you’re long, be sure to exit quickly if SMH closes below the 50-day MA by more than a few cents. Even if SMH breaks out above the $37 area, there is still resistance all the way up to the prior high of $38.32.

Because the major indices each closed near unchanged levels and in the middle of their intraday ranges yesterday, the technical picture for the broad market has not changed much since yesterday’s analysis. The key thing to watch is resistance of the Fibonacci retracement levels we pointed out in yesterday’s Wagner Daily. Since the markets are closed for Labor Day holiday on Monday, expect volume to be light and trading activity to be lethargic and choppy today. Many traders will probably head out at mid-day to begin their long weekends early, so it’s probably not going to be the most ideal session for aggressively entering a bunch of new trades.

Note that the U.S. equities markets will be closed on Monday, September 5 for the Labor Day holiday. As such, both The Wagner Daily and MTG Stalk Sheet will not be published that day. However, regular publication will resume on Tuesday, September 6. Enjoy your holiday weekend.

Today’s Watchlist:

GLD – StreetTRACKS Gold Trust
Long

Trigger = above 44.45 (above yesterday’s high)
Target = new highs (will trail stop)
Stop = 43.45 (below hourly uptrend line)
Shares = 500

Notes = We are looking to buy GLD on a break of the weekly downtrend line. A few weeks ago, we illustrated how Spot Gold (which GLD tracks) had bounced off support of a multi-year uptrend line. It now appears ready to resume that uptrend and perhaps set new highs. GLD will follow along if that happens. 1 share of GLD mirrors the price of 1/10 ounce of spot gold.

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 193.50

unrealized P/L = + $660

Closed positions (since last report):

net P/L = ($612)

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

$39,700

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