The Wagner Daily | November 4, 2005

Commentary:

The broad market built on in its newfound momentum yesterday morning, but the bullish enthusiasm faded later in the day. Nevertheless, the major indices registered another day of gains on higher volume. The S&P 500 advanced 0.4%, the Dow Jones 0.5%, and the Nasdaq Composite 0.7%. Both the Russell 200 and S&P 400 Midcap indices moved 0.3% higher. The Nasdaq’s sudden change to a bullish sentiment can be attributed to the upside reversal in the Semiconductor Index, which has gained 4.9% within the past two days and is back above its 200-day MA. However, unlike the prior day in which the major indices all closed at their best levels of the session, most stocks closed near the middle of their intraday ranges. Only a wave of buying during the last thirty minutes prevented the broad market from closing at its intraday low.

Total volume in the NYSE rose by 2% yesterday, while volume in the Nasdaq was 6% higher than the previous day’s level. This gave the Nasdaq its third bullish “accumulation day” within the past four sessions. Analyzing yesterday’s volume levels in greater detail, you will notice that overall market volume was higher during the morning rally than it was throughout the early afternoon selloff. This, of course, is also positive. However, market internals were only positive by a small margin, especially in the NYSE.

In yesterday’s Wagner Daily, we looked at a few industry sectors that were showing potential entry points on the long side. The Internet Index ($GIN) continued to advance on its weekly breakout and gained another 0.5% yesterday, its fifth consecutive day of gains. The US Home Construction Index ($DJUSHB), which closed the previous day right at convergence of its daily downtrend line and its 20 and 50-day moving averages, backed off 1.2% yesterday. However, one likely scenario is that the $DJUSHB index will consolidate in a sideways range for another day or two and then break out above the convergence of resistance levels. If it does, the upside momentum it generates should be good for at least a week of gains in the sector. But be sure to wait for confirmation of the breakout instead of buying in anticipation because the downtrend that has been in place for the past three months could just as easily resume from here.

Based on the detailed trade setup we presented subscribers to yesterday morning, we are now long BBH (Biotech HOLDR) and showing a marked to market gain of nearly two points. Since recovering back above its 50-day moving average on October 31, BBH had been consolidating just below its horizontal price resistance near the $197 level. Because it was also trading within 4% of a multi-year high, we knew there was only a minimal amount of overhead supply. As such, our plan was to buy BBH if/when it broke out above its prior high and the horizontal price resistance near the $197 level. Fortunately, it did exactly that yesterday and finished the day exactly one point below its 5-year high (the red horizontal line) yesterday. We bought BBH just over $197.25, when it gapped and rallied above its prior high (the blue horizontal line) on the chart below:

When an ETF is trading at or near a fresh multi-year high, we don’t assign price targets because there is minimal or a complete lack of overhead resistance. Therefore, our plan with BBH is to simply trail a stop in order to maximize gains and protect profit along the way. There are many factors you can use to determine where to trail your stop, but one of the simplest and most effective indicators is to use the 10-day moving average (not shown on the chart above). When a stock or ETF is trending well, the 10-day MA will often act perfectly as support or resistance for the length of time frames we generally target.

As for the broad-based indices, the Nasdaq Composite popped well above resistance of its 3-month downtrend line yesterday. Because the index closed near its prior high from October 4, we expect the index to consolidate for a few days and then attempt to build on its gains. Any retracement should be met with support of that prior downtrend line, which is roughly the same as the high of November 2:

Also notable is that the Dow Jones Industrial Average finally managed to close back above its 200-day MA yesterday. It was previously trading below it for five weeks, so it is bullish for the broad market and retail investor psychology if the index holds above it for more than a day or two. The Dow is now above its downtrend line from the September 12 high, but it is still below its long-term weekly downtrend from the March 2005 high (which we illustrated a few days ago). Resistance of that weekly downtrend line is just below the 10,600 level.

Today’s Watchlist:

We are stalking QQQQ for a potential long entry today, as it closed near the breakout level on its weekly chart. However, we feel it is likely to consolidate a few days here before breaking out to a new high. We will be monitoring QQQQ and will send an intraday e-mail alert if/when we decide to enter it today. For now, we will focus on managing our new long position in BBH.

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 = + $255

Closed positions (since last report):

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

$29,850

Notes:

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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