The Wagner Daily | September 12, 2005

Commentary:

The broad market wrapped up last week with a bullish tone, as the major indices advanced on higher volume and closed at their highest levels of the week. Stocks gapped open higher last Friday, traded sideways throughout the morning, rallied at mid-day, then consolidated and closed near their highs in the afternoon. Both the S&P 500 and Dow Jones Industrials advanced 0.8%, but the Nasdaq Composite lagged behind and gained only 0.4%. The S&P 400 Midcap Index kept pace with the S&P by closing 0.8% higher, while the Russell 2000 Smallcap Index gained 0.7%. Demonstrating a rare occurrence of relative strength, the Dow Jones Industrial Average climbed 2.2% higher for the week. The S&P 500 gained 1.9% and the Nasdaq Composite rose 1.6%. The Gold Index ($GOX) gained 4.2% last week and was among the leading industry sectors of those we regularly follow. GLD (Gold Trust), which we remain long from September 7, gained 1.4% last week and closed at a new high of the year. The long-term weekly and monthly charts of both GLD and the $GOX index are looking quite bullish now.

Total volume in both the NYSE and Nasdaq markets last Friday increased by 2% over the previous day’s levels. Volume came in just above 50-day average levels on both exchanges as well. Unlike the previous day, market internals were firmly positive. Advancing volume exceeded declining volume by a margin of 3 to 1 in the NYSE, but the Nasdaq ratio was positive by only 1.75 to 1. The higher volume gains means that last Friday was a bullish “accumulation day” across the board. Another day of institutional buying brought the number of accumulation days up to three within the past four weeks. Within the same period, the markets have also seen the same number of bearish “distribution days.”

In last Friday’s Wagner Daily, we discussed how SMH (Semiconductor HOLDR) had rallied more than 1% on Thursday, but without other industry sectors confirming the upward move. Ironically, the opposite happened on Friday. Despite a 0.8% gain in the S&P and 0.4% gain in the Nasdaq, SMH actually closed 0.6% lower, putting it just above its breakout of the four-week consolidation. Reduced quarterly guidance from Intel Corp., which is heavily weighted within both the $SOX and SMH, was largely to blame for Friday’s relative weakness in the semis. Many semiconductor stocks such as AMD, MRVL, and NSM are showing bullish weekly breakouts and sitting at 52-week highs, but Intel closed at a new four-month low and is poised to break horizontal price support at the $25.20 level. This has resulted in divergence within the Semiconductor Index that is correspondingly giving SMH mixed signals. As such, we are now taking SMH off our long watchlist because the divergence within the $SOX means that SMH is going to be choppy and indecisive as it attempts to hold its breakout from consolidation.

The Pharmaceutical HOLDR (PPH), which has been lagging the broad market for the past several years, is beginning to show signs of life and relative strength. While the S&P and Dow both remain below their August highs, PPH managed to close last week just above its August high. More importantly, PPH may be poised to break out above resistance of its monthly downtrend line, which has been in place for five years. The daily chart below shows the relative strength that PPH has been exhibiting by closing above its August high and its 20, 50, and 200-day moving averages. The long-term monthly chart below that shows how PPH is nearing the breakout point of its primary downtrend line:

Ideally, it would be good to see PPH consolidate near last week’s high for a few more days before breaking out further, but we may not get that luxury. As such, we are stalking PPH for long entry beginning today. Regular subscribers can note the trigger, stop, and target prices below. We also continue to stalk IYR (Real Estate Index Trust) for potential short entry if it trades below our trigger price. You may also want to keep an eye on HHH (Internet HOLDR), which will soon see a large move in either direction based on converging levels of the 20, 50, and 200-day moving averages. Based on the bearish looking charts of EBAY and YHOO, there is a fairly good chance that HHH will break down in the coming days. We will send an intraday e-mail alert to subscribers if we enter HHH.

As anticipated, last Thursday’s retracement to the prior downtrend line (from the August 3 high) enabled the S&P 500 to bounce off that support level on Friday. This resulted in a 1.9% gain for the week, which also enabled the index to erase most of its August loss. However, the S&P will likely see a critical test of resistance in the coming week, as it closed last Friday only four points below its August 3 high of 1,245. The horizontal line on the daily chart below shows the S&P’s close proximity to this upcoming test of resistance at the 1,245 area:

Because the 1,245 level is also the 52-week closing high, the S&P will either “make it or break it” as that area is tested. A confirmed weekly close above 1,245, especially if it does so on strong volume, would be quite bullish because the S&P would set a new 52-week high. However, the S&P could also reverse sharply if traders begin selling in anticipation of a “double top” at that level. If you’re currently long SPY or other broad-based ETFs, it is a good idea to tighten your stops now. As always, we will closely track the daily market action and simply react accordingly. Trying to predict whether or not the S&P will “make it” or “break it” is not only difficult, but often costly. Remember it is always safer and more profitable to trade what you see, not what you think!

Today’s Watchlist:

PPH – Pharmaceutical HOLDR
Long

Trigger = above 73.75 (above last week’s high)
Target = 77.80 (resistance of 200-week MA)
Stop = 71.85 (below 200-day MA)
Shares = 300

Notes = See commentary above for explanation of the trade setup.

IYR – iShares Dow Jones REIT Trust
Short

Trigger = below 65.70 (below last Friday’s low and hourly uptrend line)
Target = 61.10 (just above 200-day MA)
Stop = 67.30 (above Sept. 7 high)
Shares = 400

Notes = IYR did not trigger last Friday, but keeping it on watchlist for possible entry today. It 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 Friday’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):

unrealized P/L = + $200

Closed positions (since last report):

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

$35,872

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