The Wagner Daily | October 4, 2005

Commentary:

Stocks immediately rallied higher out of the gates yesterday morning, but the buying momentum quickly dried up, causing the major indices to drift back down to unchanged levels after the first thirty minutes. From there, the broad market remained in a narrow, sideways range throughout the remainder of the day before closing with mixed results. The S&P 500 and Dow Jones Industrial Average closed lower by 0.2% and 0.3% respectively, but the Nasdaq continued to show relative strength and managed a gain of 0.2%. Midcaps and Smallcaps outperformed the Nasdaq, with the S&P 400 gaining 0.6% and the Russell 2000 moving 0.4% higher. Unlike the prior two days in which the broad market closed strong, each of the major indices closed near the middle of their intraday ranges. Of notable sector performance, the Biotech Index ($BTK) surged 2.4% higher and closed at a fresh 4-year high. BBH (Biotech HOLDR), however, has been lagging behind the $BTK index due to relative weakness in some of the more heavily weighted biotech stocks.

Total volume in the NYSE increased by 2% yesterday, while volume in the Nasdaq was 11% higher than the previous day’s level. Because the S&P closed lower, but the Nasdaq closed higher, analysis of yesterday’s volume levels gives us mixed signals. The S&P 500 technically had a bearish “distribution day” that results from losses on higher volume, but the Nasdaq conversely had a bullish “accumulation day” from gains on higher volume. Market internals were positive in both the NYSE and Nasdaq, but advancing volume only marginally exceeded declining volume levels.

In yesterday’s Wagner Daily, we brought your attention to resistance of the intermediate-term downtrend lines on both the S&P 500 and Nasdaq Composite. Both indices have rallied significantly during the past week, providing investors with a positive feeling about the markets. However, a quick look at the daily charts shows that both the S&P and Nasdaq have come into resistance of their respective downtrend lines, meaning that entering new long positions is risky unless the indices close firmly above those trendlines. The S&P initially probed above its downtrend line yesterday morning, but sold off to close below it. The Nasdaq, despite a small gain, also remains below its downtrend line. It also closed right at resistance of its 50-day moving average. Until the market proves otherwise, we must assume the downtrends that have formed on both the S&P and Nasdaq will remain intact. Rather than being redundant and showing you the same charts again, just review yesterday’s Wagner Daily to note the proximity of those downtrend lines.

While doing our nightly research, we noticed that many other indexes and ETFs have come into or are fast approaching resistance of their daily downtrend lines as well. QQQQ (Nasdaq 100 Index) reversed after running into resistance of its two-month downtrend line yesterday, while MDY (S&P 400 Midcap Index) closed right at its downtrend line. IWM (Russell 2000 Smallcap Index) still remains below its downtrend line. Since both MDY and IWM were leaders of the broad market during the last uptrend, the inability of these indices to recover above their downtrend lines would be significantly bearish. The closely watched QQQQ is at a “make it or break it” level that will result in either a resumption of the downtrend or a breakout to new highs. The red descending lines on the charts below illustrate the current downtrends in QQQQ, MDY, and IWM:

In addition to the broad market indices above, SMH (Semiconductor HOLDR) also has run into resistance of its downtrend line. Notice how it backed off yesterday, just as QQQQ did:

When only one major index is near a key support or resistance level, but the other indices are performing inversely, the performance of the divergent index is often irrelevant. But when many indexes and sectors confirm each other with similar chart patterns, it increases the likelihood of those chart patterns following through. As you have seen, many of the major market indices are at or near key resistance levels. If the downtrends resume, this will present us with low-risk entry points for new short positions on the bounce into resistance. Therefore, we will be watching for signs of price failure and institutional distribution over the next several days. If we see it, we expect to enter new short positions. If, however, the indices begin to breakout above their downtrend lines, all bets are off on the short side. For now, lay low and wait for market confirmation before making any big bets on either side of the market.

Today’s Watchlist:

IWM – iShares Russell 2000 Smallcap Index
Short

Trigger = below 66.15 (below yesterday’s low and 20/50 day MAs)
Target = 63.20 (200-day MA support)
Stop = 67.30 (above yesterday’s high)
Shares = 500

Notes = Per the commentary above, we are looking to short IWM due to its relative weakness. However, as always, we will only enter if it trades below our trigger price, which would likely indicate resumption of the downtrend. If you have difficulty locating shares of IWM to short, you may wish to call your broker and ask them to locate shares for you (or change to a broker with a wider selection of ETFs for shorting).

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 = + $1,098

FXI long (400 shares from Oct. 3 entry) –
bought 64.61 (avg.), stop 62.80, target new high (will trail a stop), unrealized points = (0.01), unrealized P/L = ($4)

Closed positions (since last report):

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

$53,692

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