The Wagner Daily | October 7, 2005

Commentary:

The broad market continued to build on its recent losses yesterday, as small and midcap stocks again sustained the largest losses. The major indices hung out near unchanged levels throughout the first half of the day, but they fell to new lows in the afternoon. A small wave of buying during the final thirty minutes lifted the broad market off its intraday lows, but each of the major indices still suffered another day of losses. The Nasdaq Composite, smallcap Russell 2000, and midcap S&P 400 each lost 0.9%. The S&P 500 and Dow Jones Industrial Average both suffered their fourth consecutive day of losses and closed lower by 0.4% and 0.3% respectively. The one positive is that the major indices closed off their worst levels of the session, but the technical damage to the charts grew deeper.

Turnover increased across the board yesterday, causing both the S&P and Nasdaq to register another bearish “distribution day.” Total volume in the NYSE increased by 12%, while volume in the Nasdaq was 8% higher. Volume levels in both exchanges also came in well above average levels. Market internals were again firmly negative. Yesterday was the fourth straight day of higher volume losses in the S&P, clearly indicating that institutions have been running for the exit doors this week.

The benchmark S&P 500 Index is beginning to look pretty bearish on both its daily and long-term monthly charts. On the daily, it has closed below the ever-important 200-day moving average for the past two days and also remains below its prior low from August. But a break below support of a multi-year trendline on the monthly chart is likely the real culprit of the broad market’s sharp losses this week. Looking at the monthly chart below, notice how the S&P has fallen below support of its uptrend line that has been in place since the low of March 2003:

Remember that a prior support level will always become the new resistance level after the support is broken. As such, expect the S&P to have a difficult time recovering back above that uptrend line on any rally attempt.

The Nasdaq Composite looks better than the S&P on its charts, but it too is beginning to fall apart. It probed below its 200-day moving average on an intraday basis yesterday and also closed below its September low. Its downtrend that began with the high of August 3 remains intact, as the index has since set two “lower highs” and three “lower lows:”

Obviously, the 200-day moving average is a pivotal area of support on the Nasdaq. If it falls below it, all three of the major indices will be trading below their 200-day MAs, which would indicate a long-term bearish sentiment. Interestingly, the Nasdaq is clinging to support of its mulit-year uptrend line on its monthly chart, which converges with the 200-day MA on the daily chart. The S&P has already fallen below its monthly uptrend line, so will the Nasdaq follow suit as well?

The sectors that were leaders of the last major broad market rally continue to lead the way lower in the current correction. IWM (smallcap Russell 2000), which doubled from March 2003 to July 2005, has fallen approximately 5% in only the past three days. We covered half of our IWM short position yesterday at the 63.20 area when it hit our initial profit target of the 200-day moving average, but will continue trailing a stop lower on the remaining shares. MDY (midcap S&P 400), which moved in lockstep with IWM on the way up, has sold off just as sharply this week.

Institutional money has also begun leaving other former market leading industries such as Oil, Utilities, Real Estate, Home Construction. Each of those sectors now present ideal short entry points on any significant bounce. Corresponding ETFs to consider are: OIH (Oil Services), UTH or XLU (Utilities), and IYR or ICF (Real Estate). As mentioned two days ago, you need to make your own “synthetic ETF” for the Home Construction sector. The 20-MA on the 60-minute chart roughly marks resistance of the hourly downtrend lines on each of those sectors, so a rally into that level could present a good short sale entry point for a short-term trade. Also consider shorting a rally into resistance of the 50-day moving averages on any other sectors that have fallen below their 50-day MAs this week. On the upside, spot gold closed at a fresh 17-year high yesterday, pulling GLD (Gold Trust) along with it. We remain long GLD and will continue trailing a stop to maximize gains and lock in profit.

Today’s Watchlist:

There are no new plays for today, as we are waiting for a bounce or sideways consolidation before selling short a few ETFs we are stalking. As always, we will e-mail an intraday alert if/when we enter a new position.

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 = + $1,572

IWM short (250 shares from Oct. 4 entry) –
shorted 66.43, stop 65.80, target 61.10, unrealized points = + 2.90, unrealized P/L = + $725

Closed positions (since last report):

, net P/L = + $809

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

$44,028

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