The Wagner Daily | October 31, 2005

Commentary:

Just as the market gave us numerous signals that is was safe to begin re-entering the short side, the major indices suddenly reversed and closed the week with impressive gains last Friday. After beginning the day with an opening gap up, stocks never looked back, as most sectors trended steadily higher throughout the day. Both the S&P 500 and Dow Jones Industrial Average rocketed 1.7% higher, but continued weakness in the Semiconductor Index ($SOX) caused the Nasdaq to lag behind. Nevertheless, the Nasdaq still advanced 1.3%. Small and mid cap stocks kept pace with the S&P, as the Russell 2000 gained 1.8% and the S&P 400 Midcap Index rallied 1.7%. Not surprisingly, relative weakness was quite notable in the $SOX, as the sector broke key support of its 200-day moving average the prior day. The $SOX was the only industry sector we follow that closed in the red (down 0.7%). The S&P and Dow both broke their 3-week losing streaks with gains of 1.6% and 1.8% respectively. The Nasdaq only managed a 0.3% gain for the week.

Total volume in the NYSE decreased by 2% last Friday, but volume in the Nasdaq came in 5% higher than the previous day’s level. Despite showing relative weakness, the Nasdaq technically logged a bullish “accumulation day” because it closed higher and on higher volume. This helped to counter the prior “distribution days” from earlier in the week. Turnover in the NYSE declined a bit, but was still near average levels. Market internals in the NYSE were very strong, with advancing volume exceeding declining volume by a margin of 5 to 1. The Nasdaq, however, was positive by less than 2 to 1.

If you’ve been having trouble staying with positions on either side of the market lately, don’t feel bad. The market trended very smoothly throughout the first half of October and we netted solid profits, but the second half of the month has been extremely indecisive from one day to the next. To illustrate this, take a look at the hourly chart of the roller coaster ride known as the Dow Jones Industrial Average:

As you can see on the chart above, the past two weeks have seen smooth and steady trends on an intraday basis, but the direction of those trends has been changing from one day to the next. Hopefully you have been following our advice to remain mostly in cash, which is always the best position to have when the market becomes erratic. We have had a couple small losses from “testing the waters” over the past two weeks, but we have retained the majority of our profits from the beginning of the month.

As discussed in the October 28 issue of The Wagner Daily, last Thursday’s action, combined with several “distribution days” earlier in the week, gave us numerous signals that hinted at an end of the two-week chop and resumption of the primary downtrends. But Friday’s bullish action invalidated that analysis. Over the weekend, the financial media was attributing Friday’s rally to the positive GDP number released before the open, which may or may not have been a factor. Remember that professional traders don’t care about the reason why the market does what it does; the only thing that matters to traders is how they react to the market’s actions each day. So, how should traders react in the coming week? Unfortunately, it seems like the wisest thing may be to once again resume our neutral bias, as Friday’s action was too bullish to continue favoring the short side of the market (at least in the short-term). Conversely, an abundance of overhead supply and technical resistance of the primary downtrend lines makes it tricky to blindly buy stocks and ETFs at current levels.

The daily chart of the Dow Jones, as you might expect, is a choppy, sloppy mess. The weekly chart of the Dow continues to show a break of the primary weekly uptrend line from four weeks ago, but doing any type of meaningful on the shorter-term daily chart would be a moot point. The same could be said for the S&P 500, although the 200-day moving average is definitely a major level to be aware of. From October 24 to 26, resistance of the 200-day MA caused the S&P to reverse and sell off sharply on October 27. However, last Friday’s rally caused the index to once again close right below the 200-MA. Whether or not the S&P closes above it in the coming week is anyone’s guess, but you should definitely be prepared for continued volatility around this level. Like last week, the bulls and bears will probably resume their game of tug-of-war near this level. Rather than cheering for the bulls or bears, we prefer to sit on the sidelines and wait for the outcome. Doing so will make it much easier to profit than merely guessing and risking the possibility of churning our accounts. Looking at the daily chart, you will see that 1,200 is the pivotal level to watch on the S&P today:

The Nasdaq Composite reversed to close back above its 200-day MA last Friday, but it closed below the previous day’s high. Conversely, both the S&P and Dow closed well above their respective highs of the previous day. This means the Nasdaq is showing relative strength to the other indices and should be avoided on the long side, despite trading above its 200-day MA. As long as the $SOX remains weak, the Nasdaq isn’t going to rally much.

Now that earnings season is winding down, we may begin to see an end of the erratic action that has plagued stocks since mid-October. However, be aware of the Fed meeting on interest rates tomorrow, yet another factor that could spur more volatility and indecision. As we always say, patient traders are always rewarded in the long-term, so don’t be worried about missing a potential move if you’re not in the markets right now. SPY short is the sole open position we have right now, and we are quite pleased to have only one open position! There will be plenty of time to get back in the markets after the direction of the short-term trend becomes clear (the intermediate-term trend is still down). Above all, always trade what you see, not what you think!

Today’s Watchlist:

GLD – StreetTRACKS Gold Trust
Long

Trigger = above 47.35
Target = new high (will trail a stop)
Stop = 46.25 (below the 20-day MA)
Shares = 600

Notes = This setup did not trigger last week, but we still like it for potential entry today. See the October 26 issue of The Wagner Daily for commentary on this setup. Also, be aware 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):

unrealized P/L = ($288)

Closed positions (since last report):

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

$47,920

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