The Wagner Daily | October 25, 2005

Commentary:

Yesterday’s widely anticipated announcement of Alan Greenspan’s successor triggered a broad-based rally yesterday, as the major indices continued their wild volatility of the past week. After beginning the day with an opening gap up, stocks showed weakness throughout the first ninety minutes of yesterday’s session, but the subsequent announcement of Benjamin Bernanke as new chief of the Federal Reserve Board promptly put traders in a buying mood. Both the S&P 500 and Dow Jones Industrial Average gained 1.7%, while the Nasdaq cruised 1.6% higher. The smallcap Russell 2000 surged 2.2% higher and the midcap S&P 400 gained 1.9%. Demonstrating bullish action, each of the major indices also closed at their intraday highs.

Despite very solid gains in the stock market, total volume in both exchanges came in lower than the previous day’s levels. Turnover in both the Nasdaq and NYSE was 12% lighter, although volume exceeded average levels. It would have been better to see the broad market gain on higher volume, as it did last Wednesdays, but at least market internals were very strong. In the NYSE, advancing volume exceeded declining volume by nearly 7 to 1. The Nasdaq ratio was a very positive 5 to 1.

As indicated by the positive market breadth, yesterday’s buying spree was spread throughout stocks in every industry sector. Of the 24 major sectors we follow on a daily basis, not a single one of them closed in the red! In the S&P, sectors that showed the most strength were Oil and Oil Service, Utilities, Steel, and Home Construction. Strong Nasdaq sectors were Internet, Software, and Biotechs. Semiconductors, in an unusual twist, lagged behind most other sectors. Texas Instrument’s earnings report after yesterday’s close also had a negative impact on the Semis in the after-hours market.

One of the few sector ETFs that is still near its highs and looks good for potential long entry is BBH (Biotech HOLDR). Although it has been trading below its 50-day moving average since October 5, it is only 5% below its 52-week high. Rather than selling off sharply as many sectors have done over the past month, BBH has mostly corrected by time through a sideways consolidation. BBH closed yesterday above its 20-day moving average and is now poised to break out above its downtrend line that has been in place since mid-September. Because the longer-term weekly chart still looks bullish, we would consider buying BBH on a breakout of that downtrend line, which is illustrated on the daily chart below:

BBH has shown relative strength to many other sectors, as well as the major indices, during the market’s recent correction. On the weekly chart below, notice how the retracement has been comparatively mild:

Yesterday’s gains could be construed as positive for the markets, but the reality is that the major indices are continuing to show some wild day to day volatility. The Dow, for example, has traded in an intraday range of greater than 100 points in each of the past four sessions, but half of those days were up and half were down. Obviously, this type of market action makes it challenging for trend traders to realize a profit. Daytraders who thrive on intraday volatility are likely doing well over the past week, but swing traders such as ourselves profit the most when the market is trending smoothly in either direction. When the broad market was clearly trending lower throughout the first half of the month, we did quite well and locked in solid profits on the short side. But the daily indecision of the past week has made it difficult to predict the market’s direction for more than a few hours in advance. Rather than getting chopped up and constantly changing our market bias, we have simply reduced the number of open positions and the average share size in order to reduce our overall risk.

If a new trend develops from here, we will be fully ready to capitalize on it. But until earnings season has passed, we expect more of the type of action we have seen over the past week. Volatility will also stay high as the major indices start to rally into resistance of their daily downtrend lines that have been in place for the past several months. There is no sense in risking your hard-earned profits when indecision reigns supreme. If you’re a daytrader, take advantage of this wide intraday volatility in the markets. If you’re not, it would do you well to sit on your hands (or at least one of them).

Today’s Watchlist:

Due to major market indecision over the past week, there are no new “official” setups for today. However, we may enter BBH long if the market cooperates. As always, we will send an intraday e-mail alert if we enter any new ETF positions now listed on today’s watchlist.

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):

Closed positions (since last report):

net P/L = ($564)

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

Notes:

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Click here to view MTG’s past performance results (updated monthly).

Edited by Deron Wagner,
MTG Founder and
Head Trader