The Wagner Daily | September 13, 2005

Commentary:

The major indices followed up last week’s rebound with an uneventful day of sideways consolidation near the previous day’s highs. The S&P 500 traded in a very narrow three-point range throughout the entire session and finished the day less than 0.1% lower. The Dow Jones Industrial Average, which traded in an equally tight range, was unchanged. Relative strength in the Software ($GSO) and Internet ($GIN) sectors helped the Nasdaq Composite to gain 0.3%. The Russell 2000 Smallcap Index showed similar resilience by closing 0.4% higher. Also of note was the incredible strength of the Chinese tech stocks such as NTES, BIDU, and SOHU, which showed closing gains of 16%, 9%, and 7% respectively. The MTG Stalk Sheet, which focuses on individual stock plays as opposed to ETFs, netted a gain of approximately 8 points on the NTES position that was entered last week.

Total volume in the NYSE declined by 1%, but volume in the Nasdaq was 6% higher than the previous day’s level. The gains on higher volume enabled the Nasdaq to register another “accumulation day,” albeit a marginal one. Given the small percentage of both yesterday’s gain and the increase in turnover, heavy institutional buying was not apparent across the board except for within a few leading stocks. However, it was also positive that the S&P’s fractional loss did not occur on higher volume, which would have indicated churning.

In yesterday’s Wagner Daily, we pointed out the relative strength in PPH (Pharmaceutical HOLDR), which was nearing the breakout level of its five-year downtrend line. As we were hoping to see, PPH continued to consolidate yesterday, as it traded completely inside the previous day’s range. The longer it consolidates, the greater the base of support it will build. We still like the setup and are keeping it on our watchlist for entry today. Subscribers should note the updated trigger price to buy PPH. We have also adjusted the trigger price on the IYR (Real Estate Index Trust) short setup, which continues to form the right shoulder of its bearish “head and shoulders” chart pattern. SMH (Semiconductor HOLDR) again closed lower yesterday and has now given back nearly all of its gain from the September 8 breakout. Because of the relative weakness of Intel, it is good we made a judgment call to avoid buying the SMH breakout last Thursday.

Another sector ETF worth putting on your watchlist is OIH (Oil Service HOLDR). Needless to say, the high price of crude oil has fueled the strong uptrend in OIH during the past eighteen months, and particularly since May of 2005. But even strong sectors eventually correct along the way up, even if only for a short period of time. Confirmation of a price correction has not yet occurred, but yesterday’s 2.6% drop in OIH caused it to close just above support of its uptrend line. While we normally focus on buying pullbacks to an uptrend line, the difference this time is that OIH failed to hold at a subsequent “higher high” after its last correction. It also tried to break out both on September 1 and 9, but failed to follow through both times. Therefore, it appears that OIH may be running out of gas, at least in the short-term. Confirmation of this would occur if OIH closes firmly below support of its daily uptrend line, which is illustrated below:

Note that trying to predict a major top based on a correction of only several days is very difficult and never prudent. However, decent profits can often be made by shorting a short-term correction in a strong sector. If you decide to short OIH, patience is required to wait for an actual closing price below the uptrend line. Furthermore, don’t be greedy with your profit target because support of the 50-day MA is at the 112.58 area. Only advanced traders should consider this counter-trend trade that offers a potentially high reward, but also high risk of reversal. As such, we are not listing the trade as an “official” setup on our watchlist.

As for the broad market, nothing really changed since yesterday’s analysis. The main thing to watch is the 1,245 resistance level on the S&P 500, which we feel is likely to “make or break” the broad market’s direction in the intermediate-term. Expect erratic action and volatility as this level is tested within the next several days. Similarly, the Nasdaq Composite has horizontal price resistance from its prior high of August 9, which is at the 2,185 level. On the Dow, only a breakout above the 10,717 level would get us interested in possibly buying DIA. Overall, we feel there are much better setups right now within the individual industry sector ETFs as opposed to the broad market ETFs.

Today’s Watchlist:

PPH – Pharmaceutical HOLDR
Long

Trigger = below 73.10 OR above 73.58 (whichever comes first)
Target = 77.80 (resistance of 200-week MA)
Stop = 71.85 (below 200-day MA)
Shares = 300

Notes = This setup did not trigger yesterday, but we still like it going into today. Note the new trigger price above. Per the September 12 issue of The Wagner Daily, we are looking to buy a breakout above the weekly downtrend line that has been in place for five years.

IYR – iShares Dow Jones REIT Trust
Short

Trigger = below 65.78 (below the 2-day low and 40-MA on 60 min. chart )
Target = 61.10 (just above 200-day MA)
Stop = 67.30 (above Sept. 7 high)
Shares = 400

Notes = IYR remains on our watchlist for possible entry today, but note the new trigger price above. 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 = + $240

Closed positions (since last report):

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

$35,912

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