The Wagner Daily | September 9, 2005

Commentary:

Strength in the Semiconductor Index ($SOX) led the Nasdaq to an intraday gain yesterday morning, but weakness in the small caps dragged the index lower in the afternoon. Despite a gain of 1.1% in the $SOX index, the Nasdaq Composite lost 0.3% yesterday. The S&P 500 and Dow Jones Industrial Average, both of which failed to rally with the Nasdaq in the morning, each closed 0.4% lower. The S&P 400 Midcap Index shed 0.5%, while the Russell 2000 Smallcap Index dropped 0.6%. Buying interest during the final hour lifted the major indices off their lowest levels of the day, but the indices still closed in the lower half of their intraday ranges.

Total volume in the NYSE declined by 6% yesterday, but turnover in the Nasdaq was 6% higher than the previous day’s level. This means the Nasdaq technically sustained another “distribution day,” the fifth such day of institutional selling within the past four weeks. Conversely, the Nasdaq has had only two “accumulation days” of institutional buying during that same period. Nasdaq market internals had an unusual divergence yesterday. Declining stocks exceeded advancing stocks by a margin of 3 to 2, but advancing volume in the Nasdaq marginally outpaced declining volume. This tells us that more stocks closed lower than higher, but the ones that closed higher did so on much higher volume. Most likely, the concentrated relative strength within the Semiconductor sector accounted for this. In the NYSE, market internals were negative across the board.

Divergence within the industry sector groups yesterday was rather interesting. As previously mentioned, the $SOX index managed to gain more than 1% despite broad-based weakness in the major indices. In the September 7 issue of The Wagner Daily, we displayed an annotated chart of SMH (Semiconductor HOLDR) and explained that we anticipated an upside breakout of the sideways consolidation. That breakout came yesterday, but we made a judgment call to not buy SMH because the Semiconductor sector was pretty much rallying on its own. While it is certainly possible for a sector to trade in the opposite direction of the broad market for a short period of time, it is always higher risk when at least a few other sectors are not confirming the move. Even strong sectors will eventually reverse if the broad market does not confirm the move. For that reason, we passed on buying SMH, at least for now. SMH closed only about 30 cents above our original entry point, so it is still within buying range if it follows through within the next few days.

Also of interest was the Gold Mining sector ($GOX), which rallied 1.9% and closed at a new 6-month high yesterday. GLD (Gold Trust), which we are already long, rallied in sync with the mining stocks and closed at a new high of the year. The blue horizontal line on the weekly chart of $GOX below illustrates how the index is nearing the breakout level to a new 52-week high. As such, we are anticipating a similar upward move in GLD over the next several weeks:

Yesterday’s correction in the S&P 500 caused the index to drop down to new support of its prior downtrend line that was broken on September 6. Remember that a prior area of resistance becomes the new area of support after the resistance is broken. As such, the S&P should find support at this prior downtrend line. But if it does not, odds are good the S&P will fall back down to its 50-day moving average. The descending blue line on the daily chart below illustrates support of the prior downtrend line:

The Nasdaq Composite still has not rallied beyond the 50% Fibonacci retracement from its August high down to the August low. It is also sitting only 1% above its 50-day moving average. Whether or not the $SOX follows through to the upside is likely to be a determining factor for the next direction of the Nasdaq. The Fibonacci retracement lines on the daily chart below show that the Nasdaq still has a lot of overhead resistance to contend with:

Finally, keep a close eye on the performance of both MDY (S&P 400) and IWM (Russell 2000) over the next several days. The mid-caps of the S&P 400 and small-caps of the Russell 2000 were largely responsible for leading the market higher throughout the first half of the year, but both indices have begun to show relative weakness as of late. If that trend continues, it is unlikely the S&P and Nasdaq will go very far in the intermediate-term.

Today’s Watchlist:

IYR – iShares Dow Jones REIT Trust
Short

Trigger = below 65.40 (below yesterday’s low and hourly uptrend line)
Target = 61.10 (just above 200-day MA)
Stop = 67.10 (above Sept. 7 high)
Shares = 400

Notes = IYR is still forming the right shoulder of a head and shoulder pattern, which we believe will soon follow through. Our short entry is below support of the hourly uptrend line and yesterday’s low. We may subsequently tighten stop due to the 20 and 50-day MAs below, but we feel it is a good risk/reward to enter below yesterday’s low regardless.

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):

Also see “notes” below

stop 43.65

unrealized P/L = + $60

Closed positions (since last report):

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

$22,300

Notes:

We will be adding 300 shares to the GLD position only if it trades above 44.81 today. Stop will remain the same on the full position if the additional shares trigger.

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Edited by Deron Wagner,
MTG Founder and
Head Trader