The Wagner Daily | October 11, 2005

Commentary:

With the bond market closed yesterday and in celebration of the Columbus Day holiday, equities in the American markets staged a second straight day of sideways chop. After a miniscule gap up on the Dow, Nasdaq and S&P, all three major indices spent the greater part of the trading day in a tight range. Some late day selling pushed the S&P down by 8.57 (losing 0.72%), the Dow by 53.55 (giving back 0.52%), and the Nasdaq Composite by 11.43 (shedding 0.55%). Internal indicators were negative with declining volume outpacing advancing volume by a ratio of almost 4 to 1 on the NYSE and 2 to 1 on the Nasdaq. The NYSE logged 1,360 more decliners than advancers at the close (readings sub 1000 are considered solidly bearish and should not be taken lightly) and the Nasdaq was behind the eight ball by 857 by the same metric. Overall volume declined for a second day in a row as well. Keeping in mind that overall volume on Friday was below the 50-day average, tells us that volume !
today was downright anemic. This is however, typical action on a holiday.

Weakness was spread out over a number of sectors, with homebuilders ($DJUSHB) leading the decliners posting an 3.68% loss on the day. Morpheus has been bearish on this sector for some time now and continues to favor the short side in the building names. Natural Gas stocks ($XNG) also declined as the commodity continued to back off on the NYMEX from its record $14.00+ per million BTU’s hit last week, ending at a two week low of $12.975. Oil services ($OSX), Oils ($XOI) and Banking ($BKX) also received haircuts, all losing between 1.5 and 2.5% from their respective opens. Another sector which was also ended noticeably lower was the Philadelphia Semiconductor Index ($SOX). As we are fond of saying in this publication, “as goes the $SOX, so goes the Nasdaq.” That being said, the index warrants a closer technical look as it broke down below a key pivot in yesterday’s trade.

The chart above is a weekly of the Philadelphia Semiconductor Index. There are mainly two key technical events that you should be paying attention to in the graphic. The first is the break of the secondary trendline as annotated. Generally, when the secondary, or steeper, trendline is violated, the odds greatly increase that the stock or index will continue to fall to the primary (flatter) trendline. Notice as well that a move back to the primary trendline, currently having a terminus at the key psychological level of 400, would pretty much all but erase the entire gain of the April to July rally in the semiconductors. Note the prior highs at the 440 area as well. Its pretty obvious at this point that semis will test this area very soon. The question is whether they will stop here (as old resistance becomes new support) and bounce or continue down to the 400 level. One clue may lie in the daily charts.

In the daily chart of the index above, notice the 200 ma (blue line) which runs across the bottom of the chart, currently residing at the 433 area. 200 MA’s on daily charts usually act as “magnets”, pulling price action to them from above or below, and more often than not, holding them there as bulls and bears fight it out to decide if this all important moving average is support or resistance. With yesterday’s bearish close on the $SOX, it appears the odds favor at least a move to this 433 area, which is currently 13 points below us. Going back briefly to the first chart, notice that the 50 MA weekly (red line) is also right at 433. This confluence of technical indicators provides a relatively high probability that the $SOX will test this area soon. This expected weakness in the $SOX will certainly act as a drag on the Nasdaq Composite, which has been showing relative strength to the Dow and S&P, and is quickly becoming the only bright spot in an otherwise increasin!
gly bearish looking landscape.

Today’s Watchlist:

There are no new trade setups for today, as we are now near our max. exposure based on the $50,000 cash position model.

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 = + $1,668

IWM short (250 shares from Oct. 4 entry) –
shorted 66.43, stop 65.80, target 61.10, unrealized points = + 3.05, unrealized P/L = + $763

MDY short (400 shares from Oct. 10 entry) –
shorted 125.78, stop 129.75, target 121.10, unrealized points = + 0.12, unrealized P/L = + $48

Closed positions (since last report):

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

$93,673

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