The Wagner Daily | September 15, 2005

Commentary:

The major indices followed-up Tuesday’s bearish reversal with another session of losses, but this time on slightly lower volume. Small-cap stocks weighed heavily on the Nasdaq yesterday, as both the Russell 2000 and Nasdaq Composite fell 1.0%. The Dow Jones Industrial Average dropped 0.5%, the S&P 400 Midcap Index lost 0.4%, and the S&P 500 Index declined only 0.3%. Relative strength in Energy, Pharmaceutical, and Gold Mining sectors helped to minimize the losses in the S&P 500. Tech sectors including the Internet and Semiconductor stocks, as well as Retail and Biotech, each acted as an anchor on the Nasdaq.

Yesterday’s losses caused some technical damage to the charts of the major indices, which we discuss below, but it was positive that volume declined slightly in both exchanges. Total volume in the NYSE declined by 1%, while volume in the Nasdaq was 4% lighter than the previous day’s level. This prevented the formation of another broad-based “distribution day” like the previous session. Nevertheless, market internals were firmly bearish in the Nasdaq. Declining volume exceeded advancing volume by a margin of 2.25 to 1. Similarly, declining issues were double the number of advancing issues in the Nasdaq. NYSE internals were also bearish, but not by a wide margin.

Looking at individual sector performance, the obvious highlight of yesterday’s action was in the Gold Index ($GOX), which rocketed 4.5% higher! Spot gold also rallied $4 to finish the regular session just below $450 per ounce. The 0.9% gain in spot gold resulted in the same percentage move in the Gold Trust ETF (GLD), which we bought on September 7 and added to on September 9. Both $GOX, which consists of gold mining companies, and GLD, which mirrors the price of spot gold, marked their highest closing prices since last December. The spot gold commodity is now less than 4% off of its 52-week high, which corresponds to an eight-year high as well. GLD only began trading last November, so it is less than 2% below its all-time high. Looking at a daily chart of spot gold throughout the past year, you will see that it has been in an intermediate-term downtrend, but a look at the long-term monthly chart shows that the weakness has merely been a correction within the context of a four-year uptrend. The monthly chart of the spot gold commodity below illustrates how it resumed its long-term uptrend after coming into support of its uptrend line (the ascending blue line) this past June:

Notice on the chart above how the 200-month moving average (the orange line) acted as resistance that caused gold to begin its correction last December. Gold subsequently tried to break out above that 200-MA on numerous occasions in the months that followed, but failed every time. However, it is now poised to close the month of September above that 200-month MA and gold has also broken out above resistance from its downtrend line off the December high. As such, a lot of momentum has been building during gold’s ten-month correction. We now anticipate a resumption of the 4-year primary uptrend and a breakout to new highs in both spot gold and GLD. We intend to simply trail a stop on our GLD position in order to maximize profits and protect the gains.

Yesterday’s broad market losses caused the major indices to close at key levels of support for both the S&P and Dow, while the Nasdaq already broke below an important level. Most notably of the three indices, the Nasdaq Composite closed firmly below its 50-day moving average, which it was trading above for only two weeks. Considering that the index also failed to rally above its 61.8% Fibonacci retracement from the August losses, the break below the 50-day MA is significant because it indicates that a “lower high” may be forming on the daily chart. A subsequent break below the August low of 2,112 would form the corresponding “lower low” that would indicate a primary trend reversal. The possible “lower high” of September 12 is circled on the chart below:

The S&P 500 Index is still above its 50-day MA, but only by less than two points. The index also closed below support of its prior downtrend line from the August high. Going into today, watch yesterday’s low as a key area of support. If the S&P closes below that, it too will have fallen back down below its 50-day moving average. The S&P, however, is showing more relative strength than the Nasdaq at the moment. The daily chart below illustrates the break below support of the prior downtrend line (blue descending line) and the close proximity of the 50-day MA:

Just as the S&P 500 closed right at its 50-day MA, the Dow closed only three points above support of its 200-day moving average. Take a look:

As many traders know, the 200-day MA is very important as well because it usually determines long-term sentiment and bias of an index. All eyes will be on the performance of both the S&P and Dow today, as a close below yesterday’s lows will result in significant technical damage to the charts. Be very careful if you are still heavily long, but don’t get get too aggressive on the short side yet either. Markets can be very erratic and whippy near key support or resistance levels. Continue to focus on shorting individual sectors with relative weakness or buying those with relative strength to the broad market instead. Above all, always trade what you see, not what you think!

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 = + $296

IYR short (400 shares from Sept. 13) –
shorted 65.77, stop 67.30, target 61.10, unrealized points = + 0.20, unrealized P/L = + $80

PPH long (300 shares from Sept. 13) –
bought 72.78, stop 71.20, target 77.80, unrealized points = (0.54), unrealized P/L = ($162)

Closed positions (since last report):

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

$83,880

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