The Wagner Daily | September 27, 2005

Commentary:

The major indices consolidated in a narrow, sideways range just above the previous day’s highs throughout yesterday morning, but selling in the afternoon caused the broad market to fall into the red. A moderate rebound in the final hour enabled the Dow Jones Industrial Average to close 0.2% higher, but the S&P 500 finished the session unchanged. Like the Dow, the Nasdaq Composite also gained 0.2%. However, the index was showing a gain of nearly 0.8% at its morning high. Small and mid-cap stocks showed relative strength to the major indices. The S&P 400 Midcap Index gained 0.6% and the Russell 2000 advanced 0.8%.

Total market volume in the NYSE declined by 2% yesterday, while volume in the Nasdaq came in 4% lighter than the previous day’s level. Although the Nasdaq has closed higher for the past three sessions, it is negative that volume has declined in each of those three “up” days. Yesterday’s turnover in the NYSE was also the lowest of the past nine sessions. This tells us that the recovery attempt of the past several days is more the result of a technical bounce as opposed to heavy institutional buying interest. Furthermore, don’t forget that last week saw three straight “distribution days” in which the major indices closed lower and on higher volume. As such, it is not surprising that the bounce of the past several days has been on lighter volume. This combination of higher volume on the down days and lower volume on the up days is obviously bearish and indicates a high level of caution is warranted on the long side of the broad market.

Last week, we discussed the importance of the August lows as key support levels on the S&P, Dow, and Nasdaq. On September 22, both the S&P 500 and Dow Jones reversed just above their lows of the prior month. The Nasdaq also rallied that day after probing just below support of its August low. While the rally of the past few days was positive for the broad market, the combination of light volume, combined with a lot of technical overhead resistance, means the reversal attempt may be short-lived. The S&P 500, for example, now has resistance of both its 20 and 50-day moving averages, as well as resistance of its September downtrend line. This red descending line on the daily chart below illustrates resistance of this primary downtrend line. We have also circled the significant resistance of the 20 and 50-day MAs:

Because of the overhead supply and light volume on the bounce attempt, we expect a test of the September 22 low of 1,205 within the next few days. If the S&P falls below that level, odds are good it will also break below the August low of 1,201, as well as the 200-day moving average at 1,199. Such an occurrence would correspondingly trigger a break of the weekly uptrend line from the August 2004 low. The Dow Jones has a similarly ominous daily chart and is also already below its 200-day MA:

The Philly Semiconductor Index ($SOX), which tends to lead the Nasdaq, has completely failed its breakout attempt from earlier this month. It now has resistance of its September downtrend line, as well as its 20 and 50-day moving averages. Unless the $SOX can recover, it’s likely the Nasdaq will remain weak. The Biotech Index ($BTK) has been the one bright spot within the Nasdaq throughout the September weakness, but it too appears to be failing the bullish consolidation that occurred throughout most of the month. The index itself has bounced off support of its 50-day MA the past three days, but it is back below the prior highs from July and August, which is illustrated as the red dotted horizontal line on the chart of $BTK below:

If it’s any indication of whether or not the Biotechs will hold up, BBH (Biotech HOLDR) closed firmnly below its 50-day MA for the first time since April. A break below its August low around $187 will present a good short setup, as it will trap the bulls who bought the breakout and subsequent consolidation earlier in the month:

Needless to say, we remain biased to the short side of the broad market because the major indices have a lot of overhead supply. The one exception is Gold (GLD), which we remain long with a solid profit. It is holding near its all-time highs and should consolidate and go higher. Our short position in IYR (iShares REIT) is conversely holding near the lows and nearing our profit target on the downside.

Today’s Watchlist:

MDY – S&P Midcap SPDR
Short

Trigger = below 128.10 (below yesterday’s low)
Target = 123.20 (support of 200-day MA)
Stop = 130.75 (above downtrend line and moving averages)
Shares = 300

Notes = Per the commentary above, we anticipate the broad market will resume the September downtrend. The rally of the past several days provides a lower risk entry point on the short side. We will short MDY if/when it breaks below yesterday’s low.

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 = + $1,188

IYR short (200 shares remaining from Sept. 13 entry; covered 200 on Sept. 22) –
shorted 65.77, stop 64.60, target 61.10, unrealized points = + 2.67, unrealized P/L = + $534

Closed positions (since last report):

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

$40,562

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