The Wagner Daily | September 6, 2005

Commentary:

The major indices closed modestly lower across the board last Friday, as trading activity declined ahead of the three-day holiday weekend. Both the S&P 500 and Nasdaq Composite edged 0.3% lower, while the Dow Jones Industrial Average lost 0.1%. Small and mid-cap stocks resumed their corrective action and showed the most relative weakness. The S&P 400 Midcap Index and Russell 2000 Smallcap Index closed lower by 0.6% and 0.8% respectively. Each of the major indices closed near their intraday lows and also near their lows of the previous day. Despite Friday’s loss, the Nasdaq Composite snapped its 4-week losing streak by advancing 1% for the week. The S&P 500 also gained 1%, but the Dow moved only 0.5% higher last week.

Total volume in the NYSE declined by 23% last Friday, while volume in the Nasdaq was 30% lighter than the previous day. Traders often head out early ahead of extended holiday weekends, so it was not surprising to see the drop in turnover. The broad market closed lower, but the decline in volume prevented Friday from becoming another bearish “distribution day.”

The CBOE Gold Index ($GOX), which we discussed last week, is now poised to break out above its weekly downtrend line that has been in place for the past ten months. The Spot Gold commodity is also poised for a breakout as well, though gold itself does not always move in lockstep with the gold mining stocks. Subscribers can note the trade details of the long setup in GLD (StreetTRACKS Gold Trust) that we are targeting for entry this week. Along with GLD, many individual gold mining stocks will break out if the $GOX does. Stocks such as NEM and ABX are the most well known of the miners, but their charts are showing more overhead resistance than some of the smaller names such as GLG, RGLD, and GG. The best stocks to trade on the long side are those that have been consolidating near their 52-week highs, as a breakout above the weekly downtrend in the $GOX will easily push those stocks above their ranges and to new highs. As the weekly chart below illustrates, a breakout above last week’s high will enable the $GOX to break its 10-month downtrend line:

As we enter the new week, the major stock market indices are poised to open in “no man’s land,” making it difficult to anticipate a likely direction in the short-term. The S&P 500, for example, rallied to close back above its 50-day MA on August 31 and held above it for a day, but Friday’s loss pushed the index back down to just below the 50-day MA. The S&P held on to most of its gain from the August 31 rally, which is positive, but now it will once again need to overtake both its 20 and 50-day moving averages. A rally above the September 1 high of 1,227 will push the index back above its new daily downtrend line, as well as its 20 and 50-day MAs, but be careful on the long side until that happens:

The Nasdaq Composite followed a similar pattern to the S&P last week and closed Friday just one point below its 50-day MA. The 20-day MA continues to supply overhead resistance. The blue dotted horizontal line on the chart below illustrates how the prior high of 2,156, from August 24, acted perfectly as resistance on September 1. This is obviously a key area of short-term resistance to monitor going into today:

The Dow Jones Industrial Average was the only one of the three major indices that failed to rally back above either its 20 or 50-day moving averages at any point last week. This index continues to show the most intermediate-term relative weakness and should clearly be avoided on the long side unless it can recover back above its 20, 50, and 200-day moving averages that are all clustered together:

The Biotechs ($BTK) are showing relative strength and helping to give support to the Nasdaq, but the Semiconductors ($SOX) are still trading in a narrow range. We remain long BBH because it is holding the breakout, but keep an eye on SMH (Semiconductor HOLDR), which closed last week only ten cents above its 50-day MA. SMH has been trading above its 50-day MA since May, so a confirmed break below that level could indicate an intermediate-term correction in the sector. As the Semis go, the Nasdaq usually follows, so let’s carefully see how well the Semis perform over the next few days. Take it easy on trading the broad-based ETFs until the S&P and Nasdaq figure out whether or not to recover above or stay below their pivotal 50-day moving averages. One positive is that, either way, volume should begin to return to the markets now that summer holidays are concluding.

Today’s Watchlist:

GLD – StreetTRACKS Gold Trust
Long

Trigger = above 44.45 (above Sept. 1 high)
Target = new highs (will trail stop)
Stop = 43.45 (below hourly uptrend line)
Shares = 500

Notes = This setup from last Friday did not trigger, but we continue to stalk for entry today. 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):

unrealized P/L = + $282

IWM short (500 shares from Sept. 2) –
shorted 66.15, stop 67.42, target 63.10, unrealized points = (0.02), unrealized P/L = ($10)

Closed positions (since last report):

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

$72,407

Notes:

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Click here to view MTG’s past performance results (updated monthly).

Edited by Deron Wagner,
MTG Founder and
Head Trader