The Wagner Daily | September 14, 2005

Commentary:

Monday’s bullish consolidation failed to follow through to the upside, as stocks sold off across the board on higher volume. After beginning the day with an opening gap down, the major indices drifted lower throughout the morning session. With two hours remaining before the close, the major indices suddenly surged to new intraday highs and attempted to reverse, but stocks came back down as quickly as they went up. Both the S&P 500 and Dow Jones Industrial Average lost 0.8% and closed at their intraday lows. A small 0.2% gain in the Semiconductor Index ($SOX) enabled the Nasdaq Composite to show relative strength, but the index still dropped 0.5%. Conversely, the Russell 2000 Smallcap Index showed the most relative weakness and lost 1.1%. The S&P 400 Midcap Index closed 0.7% lower.

Turnover in the Nasdaq increased by 3% yesterday, while total volume in the NYSE was similarly 2% higher than the previous day’s level. The broad market’s losses on higher volume caused both the S&P and Nasdaq to register a bearish “distribution day,” the first since the bullish follow-through day of September 6. Given that the broad market has also had a few “accumulation days” within the past two weeks, it’s not unusual to also have an occasional day of institutional selling as well. However, given the technical overhead resistance in the major indices right now, the uptrend that began on August 31 could easily unravel if the markets see another few days of heavy selling.

For the past several days, we have been pointing out resistance of the 1,245 resistance level in the S&P 500. Based on yesterday’s “distribution day” that occurred a few points below that level, it is clear that traders are indeed nervous about the S&P’s test of that prior high. As such, caution is definitely warranted on the long side of the market unless the index closes and holds firmly above the August high for more than a day or two. Conversely, it may be tricky to sell short SPY because it still has support of its prior downtrend line from the August high, as well as both the 20 and 50-day moving averages just below that. It seems likely the index is more likely to trade in a sideways range for a while as opposed to collapsing from here. The same can be said for the Dow, as it now has a similar daily chart pattern. The Nasdaq Composite has more overhead supply than the S&P because it has only retraced about two-thirds of its August losses.

We feel the markets are at a critical “make it or break it” juncture that is likely to determine the overall bias for the next several months. It is wise to be positioned on both sides of the market by shorting the sectors with the most relative weakness and buying those with the most relative strength to the broad market. Doing so will reduce your risk if the market suddenly makes a dramatic move. Further, you are less likely to get “chopped up” trading the sector-specific ETFs as opposed to those that track the major indices. On the long side, we like GLD and PPH, the latter of which has begun to show relative strength. On the short side, IYR (or ICF) and OIH (discussed yesterday) look interesting. We will take a look at some new charts of the broad market when the technical picture changes from our last analysis.

Today’s Watchlist:

There are no new trade setups for today, as we are now near our max. exposure based on the $50,000 cash position model.

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 = + $64

GLD long (800 shares total — bought 500 on Sept. 7 and 300 on Sept. 9) –
bought 44.59 (avg.), stop 43.65, target new high (will trail stop), unrealized points = (0.03), unrealized P/L = ($24)

PPH long (300 shares from Sept. 13) –
bought 72.78, stop 71.20, target 77.80, unrealized points = (0.35), unrealized P/L = ($105)

Closed positions (since last report):

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

$83,621

Notes:

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Click here to view MTG’s past performance results (updated monthly).

Edited by Deron Wagner,
MTG Founder and
Head Trader