The Wagner Daily | September 8, 2005

Commentary:

The broad market spent the session trading in a narrow, sideways range, but each of the major indices closed marginally higher and built on their gains of the previous day. Each of the major indices opened slightly lower yesterday, but grinded higher and finished near their best levels of the session. The Dow Jones Industrial Average again showed relative strength and moved 0.4% higher. Both the S&P 400 Midcap and Russell 2000 Smallcap indices closed 0.4% higher as well. The S&P 500 and Nasdaq Composite each gained 0.2%.

Volume continued to return to the markets as the annual “summer doldrums” come to an end. Turnover in the NYSE rose by 8% yesterday, while total volume in the Nasdaq increased by 6% over the previous day’s level. As the S&P and Nasdaq each closed higher yesterday, both indices scored another “accumulation day.” It was the second consecutive day of institutional buying, but remember that the broad market has had at least four bearish “distribution days” within the past four weeks as well. Market internals were mixed throughout the day, but closed positive. In both exchanges, advancing volume exceeded declining volume by a margin of 1.6 to 1.

Relative weakness in heavily weighted stock Genentech (DNA) caused the Biotech HOLDR (BBH) to lose support of its hourly uptrend line yesterday. However, our trailing stop strategy nevertheless enabled us to lock in a gain of 3.38 points on the BBH position. The Semiconductor HOLDR (SMH), which we targeted for long entry yesterday, failed to exceed the September 6 high and therefore has not yet broken out of its sideways consolidation. We continue to stalk SMH for possible long entry today, but only if it clearly trades above Tuesday’s high. The 20-day moving average again acted as support on SMH yesterday morning.

One sector we want to bring your attention to is the DJ Home Construction Index ($DJUSHB). Last month, after many broke below their 50-day moving averages, we pointed out the bearish reversal and relative weakness in the home construction stocks. Since the beginning of September, the index has retraced a little more than a third of the previous month’s losses, but many home construction stocks are now coming into resistance of their downtrend lines and 50-day moving averages. The $DJUSHB index, for example, closed just shy of its downtrend line from the July 29 high and also has resistance of its 50-day MA just overhead:

The resistance shown on the chart above indicates that many stocks within the home construction index are again presenting ideal entry points for new short positions. Further, a miss in the quarterly earnings of Hovnanian (HOV) after the close yesterday caused most stocks within the sector to trade sharply lower after hours. While we never trade stocks purely because of news, we have found that negative news often coincides with pivotal areas of support or resistance. In this case, the HOV earnings report, combined with the downtrend line and 50-day MA of the $DJUSHB index, should cause the home construction stocks to resume their downtrends. As you probably know, there is not an ETF that directly tracks the home construction stocks, but you can make your own “synthetic ETF” by shorting a small basket of stocks within the sector. For example, instead of shorting 600 shares of one home construction stock, consider shorting 200 shares of three different ones. Doing so reduces your risk by giving you the same benefit of diversification that ETFs offer.

Because the Real Estate Index Trusts (REITs) often move in sync with the home construction stocks, you may want to keep an eye on both the IYR and ICF exchange traded funds. Although we stopped out of ICF a few days ago, its bearish head and shoulder pattern is still intact. A drop below its 50-day moving average would be sufficient reason for us to reshort it. As always, we will send an intraday e-mail alert to regular subscribers if/when we short ICF (or IYR).

As for the major indices, yesterday’s action did little to change the technical picture on the daily and weekly charts. The 0.4% gain in the Dow Jones Industrial Average caused the index to close right at resistance of its weekly downtrend line that began with the March high (as illustrated in yesterday’s Wagner Daily). While the downtrend line could prove difficult for the Dow to immediately overcome, the blue chip index has suddenly been showing clear relative strength during the past two days. As such, shorting DIA strictly because of the downtrend line is probably not a good idea. Both the S&P and Nasdaq are moving closer to their 52-week highs, but it is wise to maintain tight stops on long positions until the indices prove they will not set lower highs. Given the advance of the past two days, there is a good chance the broad market will pause to catch its breath today. But if it does not, we can interpret the recent market action of the bullish reversal to be quite positive.

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 = This setup did not trigger yesterday, but we continue to stalk it for long entry today. 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.

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 = ($45)

Closed positions (since last report):

net P/L = + $336

IWM short (500 shares from Sept. 2) –
shorted 66.15, covered 67.22 (avg.), points = (1.07), net P/L = ($545)

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

$22,165

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