The Wagner Daily | September 20, 2005

Commentary:

Some strong selling in the broad market yesterday wiped out Friday’s gains and pushed the markets notably lower by the close of trading. When all of the smoke cleared, the Dow lost .79%, the S&P shed .56% and the Nasdaq lost .70%. Although there was weakness in a large number of sectors across the market, energy stocks seemed to ignore it and closed much higher. At the 3pm close on the New York Mercantile Exchange (NYMEX), Crude Oil last traded at $66.65 a barrel (5.8% gain on the day), and natural gas futures tacked on 11.5%, ending the day at a new record $12.42 per million BTU’s. This strong energy action translated into further gains for drilling, oil services and natural gas stocks. Oil Services ($OSX), which can be traded using OIH, continued its march forward and broke out to a new 52 week high yesterday as shown in the weekly chart below.

Although crude oil and crude related stocks often get all the attention when the price of crude strengthens, other commodities that move in sync should not go unnoticed. As crude has continued its assault on the $70 per bbl level, natural gas futures have also moved substantially higher in the last few months and natural gas stocks along with them. The weekly chart below shows the $XNG, or Amex Natural Gas Index. Although there is not an ETF which currently tracks the natural gas stocks, a synthetic ETF can be effected by creating a basket consisting of XTO, APA, APC, BR, NBL and EP just to name a few of the leaders in this sector. Morpheus has been noticing similar strength in coal and coal producers as of late which are tracked by the $DJUSCL, or Dow Jones U.S. Coal Index.

In direct contrast to the strength in energy commodities and related stocks was some weakness in the Semiconductor Index, or $SOX. As readers of the Wagner Daily know, the semis generally lead the Nasdaq and gains in the Nasdaq often act as the catalyst for moves in the S&P and Dow. Its very difficult for the Nasdaq to make a meaningful and lasting advance if the semiconductor stocks are lagging. That being said, notice the chart below of the $SOX which clearly shows a trendline break which occurred yesterday.

We have annotated the “cup and handle” formation on the chart which may be in danger of failing here. The cup and handle is one of the most powerful chart patterns on longer term (daily and weekly) charts. Although very often in this bullish pattern the right side of the cup (early September price action) is lower than the left side (early August price action), its generally assumed that the trendline which forms the bottom of the cup (drawn in blue) should not be violated. This violation, coupled with a break of the 50 period daily moving average (red line), would lead us to believe that the semis may wish to digest their gains from the April rally a bit longer before rallying further. Remember, if the semis are “stuck” here the Nasdaq will not advance. If the Nasdaq cannot advance, then it may act as a ‘drag’ on the stronger S&P. Right now all eyes are trained on one specific pivot, that being the prior four year highs on the S&P at 1245.86 which were bre!
ached on August 3rd of this year. When the S&P crossed that pivot, it did so with the Nasdaq firmly on its heels but the Dow was dragging at the time and got stuck just over the 10,700 area, about 300 points shy of its 2005 highs. Notice that what subsequently occurred was that the major indexes all retreated as it was difficult for the $SPX and $COMPX to continue their advance while the Dow wallowed behind.

No analysis of broad market action is really complete until overall volume is taken into consideration. As stated in yesterday’s publication, Friday’s huge surge in overall volume was skewed by some abnormal events and those should be taken into consideration when analyzing whether or not Friday (Dow up 83.19) was really an accumulation day or if Monday (Dow down 84.31) was a distribution day. Like with everything in the markets, one picture is often worth a thousand words. The chart below is daily total volume in the NYSE charted on an hourly basis.

Due to the weighting change in the S&P and the occurence of quadruple witching option expiry on Friday, overall volume on 9/16 was absolutely monstrous. We have no real way of knowing how much of the turnover on this day was real buying or more a result of the aforementioned special events. Its definitely notable though that Monday’s overall volume came in higher than any of the trading days last week (excepting Friday), and was higher than any trading day since September 1st. So if we filter out Fridays volume as an anomaly, then it becomes pretty clear that the market turned in a distribution day yesterday.

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 = + $1328

IYR short (400 shares from Sept. 13) –
shorted 65.77, stop 66.90, target 61.10, trend lined points = + 0.80, unrealized P/L = + $320

PPH long (300 shares from Sept. 13) –
bought 72.78, stop 71.20, target 77.80, unrealized points = (1.17), unrealized P/L = ($351)

Closed positions (since last report):

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

$84,601

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