The Wagner Daily | September 7, 2005

Commentary:

Traders returned from the holiday weekend in a bullish mood, causing stocks to gap up and rally sharply during the first ninety minutes. The major indices subsequently consolidated throughout the afternoon and closed at their intraday highs. The formerly lagging Dow Jones Industrial Average zoomed back above resistance of its 20, 50, and 200-day moving averages and posted a 1.4% gain. The S&P 500 Index closed 1.3% higher and the Nasdaq Composite advanced 1.2%. The S&P 400 Midcap Index gained 1.1%, while the Russell 2000 Smallcap Index rallied 1.7%.

Not only did the broad market register impressive gains yesterday, but it did so on higher volume as well. Total volume in the NYSE was 8% higher, while volume in the Nasdaq increased by 25% over the previous day’s level. It was the second confirmed “accumulation day” in the NYSE and Nasdaq within the past four weeks. Volume in both exchanges also came in above their 50-day average levels, but note that yesterday’s volume increase was slightly skewed by last Friday’s large decline in volume that preceded the three-day weekend. Market internals were also bullish. Advancing volume exceeded declining volume by nearly a margin of 5 to 1 in the NYSE and just below 4 to 1 in the Nasdaq. The positive breadth was confirmed by the fact that nearly every industry sector we follow closed higher yesterday.

BBH (Biotech HOLDR) gained 1.7% and closed exactly at $200, a new high not seen since September of 2000. SMH (Semiconductor HOLDR), which we also have been following closely the past several days, gained 1.4% and closed within pennies of the upper channel of its recent trading range. Biotechs are showing more relative strength than the Semis overall, but SMH now presents a good risk/reward ratio for long entry if it rallies and holds above yesterday’s high. Yesterday’s low of 36.60 perfectly coincides with support of the 20-day moving average, so a logical place for your protective stop would be just below that level. The blue horizontal line on the daily chart of SMH below illustrates the point where SMH will break out of its four-week consolidation. If you buy the breakout, a stop below the 20-day MA (beige line) is a good idea:

While most industry sectors closed higher yesterday, GLD (StreetTRACKS Gold Trust) was one of the few ETFs that closed slightly lower. However, this was not a big deal because it did not yet trade above our trigger price to buy. We continue to stalk GLD for entry today because we still like the setup.

Yesterday’s broad-based rally enabled the Dow Jones Industrials to close above its 20, 50, and 200-day moving averages for the first time since August 15. The Dow also closed above its intermediate-term downtrend line from the high of August 10. Both of these factors certainly make the Dow look better, but a lot of overhead supply remains from the prior highs of July and August. More importantly, the Dow is now coming into resistance of its primary weekly downtrend line that began with the high of March 2005. The descending blue line on the weekly chart below illustrates resistance of the primary downtrend line:

The Dow’s breakout above its moving averages and the intermediate-term downtrend line means there is no longer a positive risk-reward for shorting DIA at the current level. However, until the six-month downtrend line is broken, caution is required on the long side.

Unlike the Dow, which has been trending lower for six months, the S&P 500 has only been in a downtrend since August 3. The S&P also closed above its March high, which the Dow is still trading below. The blue dotted line on the weekly chart of below illustrates how the S&P closed above its March high. The descending red line shows that the index also closed above its one-month downtrend line:

Yesterday’s rally put the S&P within only 1% of its 52-week high and also above its 61.8% Fibonacci retracement from the August high down to its August low. As such, there is a minimal amount of overhead resistance on the S&P. Because of this, we feel the S&P is likely to test resistance of its 52-week high within the next week or two. The weekly chart of the Nasdaq Composite looks very similar to the S&P 500, although the index is still 2.3% off the high. Resistance of the January 2005 high, just below the August high and at the 2,191 area, is a factor to watch if the Nasdaq attempts to follow-through to the upside.

Today’s Watchlist:

SMH – Semiconductor HOLDR
Long

Trigger = above 37.22 (above yesterday’s high)
Target = new high (will trail stop)
Stop = 36.45 (below yesterday’s low and 20-day MA)
Shares = 500

Notes = SMH has been consolidating in a narrow range for the past four weeks and appears poised to resume its weekly uptrend that began in April. The risk/reward for entry is ideal here, as we can have a tight stop just below yesterday’s low if it breaks out today.

GLD – StreetTRACKS Gold Trust
Long

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

Notes = This setup has not yet triggered, but we still like it and the setup remains valid. 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 198.60

unrealized P/L = + $480

IWM short (500 shares from Sept. 2) –
shorted 66.15, stop 67.42, target 63.10, unrealized points = (1.01), unrealized P/L = ($505)

Closed positions (since last report):

net P/L = + $328

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

$53,580

Notes:

MTG Opening Gap Rules

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Edited by Deron Wagner,
MTG Founder and
Head Trader