The Wagner Daily | October 3, 2005

Commentary:

Stocks closed the month and the third quarter on a positive note last Friday, as the major indices added to their gains from the previous day’s rally. After spending most of the day in a narrow, sideways consolidation, a wave of buying into the close pushed the broad market into positive territory. The Nasdaq Composite again showed the most leadership of the major indices and added another 0.5% to its prior day’s gain of 1.2%. The S&P 500 eked out a 0.1% gain and the Dow Jones Industrial Average moved 0.2% higher. The S&P 400 Midcap Index, which began showing relative weakness in mid-September, gained 0.7%, while the Russell 2000 Smallcap Index advanced 0.4%. Each of the major indices closed at their intraday highs for the second consecutive day, a positive sign of at least minor institutional support. Despite its relative strength of the past two days, the Nasdaq Composite still finished the month of September less than 0.1% lower. The S&P 500, however, gained 0.7% and the Dow Jones rallied 0.8% for the month.

It was positive that the major indices added on to their gains from last Thursday’s rally, but the one negative is that stocks did so on lighter turnover. Total volume in the NYSE declined by 5% last Friday, while volume in the Nasdaq was 9% lower than the previous day’s level. Volume levels were below average in both exchanges, but market internals were firmly positive across the board. Advancing volume exceeded declining volume by a margin of approximately 2 to 1 in both exchanges.

Tech stocks again comprised the leading industry sectors last Friday. The Semiconductor Index ($SOX) powered 1.9% higher, bringing its two-day gain to 3.5%. The Biotech Index ($BTK) similarly gained 1.6%, although several large-cap Biotech stocks lagged behind the index and held down BBH (Biotech HOLDR). Sector rotation was also prevalent last Friday, as market leading industries such as Utilities, Oil, and Gold each corrected from their strong uptrends and record highs.

In the September 30 issue of The Wagner Daily, we pointed out how the S&P 500 had recovered to close above both its 20 and 50-day moving averages, but was still below resistance of its September downtrend line. Friday’s session saw a test of both moving averages, which the index again closed above, but the S&P is now forced to test resistance of that September downtrend line. It’s bullish that the S&P has held above the 20 and 50-day MAs for the past two days, but we must assume the current downtrend, which has been in place since September 9, will remain intact until the index proves otherwise. Even if the S&P rallies above the September downtrend line, it will need to contend with a lot of overhead supply from late July and early August:

As for the Nasdaq Composite, it will likely test resistance of its 50-day MA in the coming days, but remember that its downtrend line from the August high is just above that 50-day MA. A rise in volume and broad-based momentum will be necessary in order to power the index above those resistance levels:

Resistance of the downtrend lines on both the S&P and Nasdaq mean that caution is still required on the long side of the market. Many industry sectors are showing signs of exhaustion as well, so we feel it is risky to begin buying aggressively just because the S&P has bounced back above its 20 and 50-day MAs. Our short-term broad market bias has become neutral, as we feel being positioned largely in cash is the best play right now.

Because we just finished the month of September, it’s a good idea to take an updated look at the longer-term monthly charts of the major indices. Looking at the monthly chart, you will see the S&P 500 has spent the past three months just below resistance of its 61.8% Fibonacci retracement level from its high of March 2000 down to the low of October 2002:

As you may know, the 61.8% Fibo level is generally considered to be the last major resistance level that an index encounters when retracing against the direction of the primary trend. If the downtrend that began in 2000 is to resume, it will likely do it from here. Therefore, we strongly feel the S&P 500 is at a critical juncture that will determine its trend for at least the next year. If the S&P can form a monthly close above its 61.8% retracement level, above 1,245, it will be quite bullish. However, the current level could just as easily mark the high of a bear market bounce that began with the bear market of 2000. Such a situation would likely result in new lows being set within the next one to two years. Monthly charts obviously present too long of a timeframe on which to base your short-term trading decisions, but they help you to keep perspective of the big picture. This, in turn, helps you to keep a clear head and prevents you from becoming too biased on either side of the market.

Today’s Watchlist:

FXI – iShares Xinhua China 25 Index
Long

Trigger = above 64.58 (above Friday’s high)
Target = new high (will trail a stop)
Stop = 62.80 (below support of recent consolidation)
Shares = 400

Notes = Per analysis in the September 30 issue of The Wagner Daily, we are anticipating new highs in FXI now that it has broken out above its consolidation. Because FXI is an ADR, it tends to be quite “gappy,” so remember to use the MTG Opening Gap Rules in the event of a gap up above the trigger price.

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):

, unrealized P/L = + $1,266

Closed positions (since last report):

net P/L = + $360

MDY short (300 shares from Sept. 27 entry) –
shorted 128.09, covered 130.76, points = (2.67), net P/L = ($807)

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

$28,020

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