The Wagner Daily | October 26, 2005

Commentary:

Stocks closed lower across the board yesterday, but this time the major indices held on to most of their prior day’s gains. The broad market trended lower throughout most of the session, but a rally during the final ninety minutes of trading enabled the major indices to close at only a fraction of their worst intraday losses. The Dow Jones Industrial Average lost 0.1%, the S&P 500 0.2%, and the Nasdaq Composite 0.3%. The smallcap Russell 2000 fell 0.6% and the midcap S&P 400 dropped 0.2%. Overall, yesterday’s retracement was minor considering the degree of the previous day’s gains. For a change, it was refreshing to see the broad market not trade in the completely opposite direction of the prior day’s trend.

One negative of yesterday’s session is that volume rose in both exchanges. Total volume in the NYSE was 5% higher than the previous day’s level, while volume in the Nasdaq increased by 2%. Yesterday’s losses, combined with the increase in volume, made yesterday a bearish “distribution day” for both the S&P and Nasdaq. It was the first distribution day since last Wednesday’s bullish follow-through day. Since that day, the S&P 500 has had two up days and two down days, but neither of the up days were on higher volume. One of the two down days was on higher volume. This pattern tells us that institutions have not been rushing back into the market since the October 19 “accumulation day.”

In yesterday’s Wagner Daily, we illustrated a chart of BBH (Biotech HOLDR), which we felt was poised to breakout to the upside. Bucking the trend of the broad market yesterday, it did just that. Although the Nasdaq lost 0.3%, BBH rallied 1.2% and closed back above its 50-day moving average for the first time since September 22. The daily downtrend line that began with the mid-September high should now act as the new support on any pullback. If you bought BBH yesterday, keep an eye on its next major resistance level of the prior intraday high from October 4. Consider selling partial share size into strength or at least tightening your stop if BBH makes a run for that resistance level just over $196. We have circled this resistance level on the chart of BBH below:

Another sector ETF that caught our attention yesterday was GLD, which tracks the price of the spot gold commodity. As monthly subscribers will recall, Morpheus recently netted a large profit in GLD by catching the September breakout and trailing a stop into mid-October. GLD hit our trailing stop on October 12 when it began its short-term price correction. However, the correction seems to have been short-lived, as GLD has already recovered and may once again be poised to set new highs in the coming week. Specifically, we like that GLD has rallied back above its hourly downtrend line from the October 11 high. When the weekly and daily charts both show strong uptrends, you can use the hourly chart to determine when to re-enter strong stocks that have had short-term corrections. Looking at the hourly chart of GLD below, notice how it gapped up and held above its hourly downtrend line yesterday:

The daily chart shows that GLD is sitting above its 20 and 50-day moving averages and, unlike most industry sectors right now, is well above its 200-day moving average. GLD is also less than 1% away from its prior 52-week high, which also correlates to a 17-year high in the price of spot gold. Because the daily and weekly charts show no major overhead resistance and the hourly chart shows a break of the short-term downtrend, we feel now is the time to re-enter GLD on the long side in anticipation of new highs. Notice the lack of overhead supply on the daily chart of GLD below:

BBH and GLD are two of the best looking ETFs we see right now because they track specific industry sectors as opposed to broad-based indices. As you know, the S&P, Dow, and Nasdaq have been extremely indecisive over the past week and are likely to remain that way until earnings season has concluded. But if you focus on trading specific industry sectors instead of the broad market, you can decrease your risk because a strong sector will usually trade independently of the broad market. This is why both BBH and GLD rallied more than 1% yesterday while each of the major indices closed lower.

Today’s Watchlist:

GLD – StreetTRACKS Gold Trust
Long

Trigger = above 47.25 (above Friday’s high)
Target = new high (will trail a stop)
Stop = 46.25 (below the 20-day MA)
Shares = 600

Notes = See commentary above for complete explanation of trade setup. Also, note that GLD gaps a lot due to overnight changes in the price of spot gold futures. As such, always use the MTG Opening Gap Rules to manage the entry and stop prices.

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):

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

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