The Wagner Daily | September 29, 2005

Commentary:

The major indices remained stuck in their choppy and irresolute trading ranges for another day, as yesterday’s uneventful session was nearly a clone of the previous day’s. After trading sideways for the first two hours, stocks began to sell off at mid-day and trended lower until buyers stepped in during the final two hours. The broad market indices briefly recovered into positive territory, but the bears once again took control during the last hour of the session and caused the major indices to finish near unchanged levels. The Nasdaq Composite lost less than 0.1%, but the Dow Jones Industrial Average advanced 0.2%. The S&P 500 continued its balancing act and eked out a 0.1% gain. Interestingly, the S&P has closed higher in each of the past four sessions, but each day’s change has been a fractional advance of less than or equal to 0.1%. Small and midcap stocks showed the most relative weakness, as the Russell 2000 Index lost 0.5% and the S&P 400 dropped 0.2%. Each of the major indices again closed near the middle of their intraday ranges, confirming the recent indecision and lack of direction.

Turnover was marginally higher across the board yesterday. Total volume in the NYSE increased by 3%, while volume in the Nasdaq was 6% higher than the previous day’s level. Because the S&P 500 closed higher and the Nasdaq closed lower, we could technically say that the S&P had an “accumulation day” and the Nasdaq had a “distribution day.” However, each of the broad market indices showed a complete lack of direction and closed near the flat line. Therefore, not much should be read into yesterday’s slight uptick in volume. Mixed market internals also complicated the analysis of yesterday’s volume.

In yesterday’s Wagner Daily, we discussed how the recent indecision in the S&P 500 caused the index to form three consecutive “doji star” candlestick formations on its daily chart. Yesterday’s intraday volatility and closing price near the opening price caused yet another “doji” to form:

If you study the historical chart of the S&P, or any of the major indices, you will see it is highly unusual for the index to have more than two “dojis” in a row. Equilibrium of supply and demand is usually resolved quickly, at least in the short-term. However, the longer that a period of indecision continues, the greater the move will be when it eventually comes. Therefore, it has become extremely important that you are prepared to quickly close any positions that are on the wrong side of the market when the move eventually comes. The overhead resistance of the 20 and 50-day MAs, combined with last week’s “distribution days,” means the likely direction of the next move will be lower, but be prepared either way. It is also the end of the third quarter and institutional “window dressing” by mutual and hedge funds can also cause some erratic moves in stocks that may fool you as well.

Unfortunately, this week’s lack of direction in the broad market and many industry sectors does not provide us with much fresh commentary and technical analysis to write about. So, let’s take a quick look at each of our open ETF positions instead. Doing so will enable you to have a clear plan on how you may wish to manage those positions regardless of which direction they move. Of the three open positions, the most promising is GLD (Gold Trust), which is currently showing an unrealized gain of about 5% since our first entry point on September 7:

As you can see, GLD resumed its uptrend yesterday after the previous day’s shakeout below the uptrend line. It closed only 26 cents below its all-time high and will probably test that level today. As regular subscribers know, we sold 25% of the position near the highs on September 22, but we are still long the remaining shares and will continue to trail a stop below support of the uptrend line illustrated above. Overall, GLD looks great!

We also remain short IYR from our September 13 entry and it is also showing an unrealized gain of 5%. As the chart below illustrates, IYR has been consolidating near its lows for the past four days, which means it is likely it will fall to new lows. The dotted horizontal line on the chart below illustrates the support level we are anticipating IYR will fall below. Our stop is now just above the highs of the sideways range:

Of the three open positions, the MDY short is the one that is showing the most indecision. Our expectation is that the recent bounce will result in a “lower high” being formed, which will cause MDY to drop back down and set new lows. However, like the S&P, its recent action has been quite indecisive. The trade is only 0.4% against us right now, so we are sticking to our original stop above convergence of the 20 and 50-day moving averages. Midcaps have been showing more relative weakness than the S&P, Dow, and Nasdaq, so we are in good shape if the broad market begins to fall. A break below the lows of the past two days should trigger a breakdown to a new low for the month:

Today’s Watchlist:

There are no new trade setups for today, as we are near our maximum buying power based on the $50,000 model account size.

Daily Performance 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):

stop 45.75

, unrealized P/L = + $1,326

IYR short (200 shares remaining from Sept. 13 entry; covered 200 on Sept. 22) –
shorted 65.77, stop 63.90, target 59.60, unrealized points = + 3.31, unrealized P/L = + $662

MDY short (300 shares from Sept. 27 entry) –
shorted 128.09, stop 130.75, target 123.20, unrealized points = (0.51), unrealized P/L = ($153)

Closed positions (since last report):

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

$79,152

Notes:

Click
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