The Wagner Daily | November 8, 2005

Commentary:

The broad market began the new week on a relatively quiet note yesterday, as the major indices continued to consolidate near last week’s highs. The S&P 500 rose 0.2%, the Nasdaq Composite gained 0.4%, and the Dow Jones Industrials rallied 0.5%. The S&P 400 Midcap Index advanced 0.2% and the Russell 2000 Index 0.5%. Most sectors closed in the upper half of their intraday ranges, though not at the highs.

Total volume in the Nasdaq was 2% higher than the previous day, which gave the index another bullish “accumulation day,” but turnover in the NYSE declined by 3%. Obviously, it would have been better to see volume rise across the board on a day of gains, but yesterday’s action was more of a consolidation than a trending day. Market internals were positive, but not by a wide margin. Advancing volume exceeded declining volume in both exchanges by less than 3:2. Nevertheless, stocks held on to last week’s gains and a look at the price to volume action indicates sellers were simply not around.

Both the Nasdaq Composite and Nasdaq 100 indices closed yesterday at pivotal levels. As the chart below illustrates, the Nasdaq Composite closed right at horizontal price resistance of its prior high from September 12:

If the market is going to correct from here, this resistance level on the Nasdaq provides the perfect excuse for traders to sell into strength. However, the longer the Nasdaq consolidates near its recent highs, the more likely it will soon break out above that resistance level. For now, the Nasdaq and the other major indices show no signs of a price correction, but we just want to give you a heads up on that important resistance level. Similarly, the Nasdaq 100 Index is sitting right at resistance of its 52-week high from November 2004. We illustrated this with QQQQ yesterday, but the weekly chart of the Nasdaq 100 obviously looks the same:

Not only is the Nasdaq at resistance of a prior high, but the Dow will now test its prior weekly high as well. As you can see on the chart below, the Dow finished above its prior high on a closing price basis, but is still below the intraday high of October 3:

Going into today, our bias remains cautiously bullish overall. Several sectors such as Biotechs and Semiconductors are showing a lot of relative strength and appear poised to move higher. We remain long BBH (Biotech HOLDR) because of this. However, a correction at current levels would not be out of line considering the horizontal price resistance levels highlighted above. As for the short side, the only broad-based ETF we would consider is MDY (S&P 400 Midcap), as it remains below resistance of its daily downtrend line from the August high:

But only a break below yesterday’s low would trigger a potential short entry. If that low is not broken, the consolidation could result in a breakout to a new high. We’re prepared for either a breakout in QQQQ (and other indices) or a resumption of the primary downtrend in MDY (among others). Be alert and ready to change sides at a moment notice, as we are at pivotal levels now.

Today’s Watchlist:

MDY – S&P Midcap SPDR
Short

Trigger = below 129.90 (below yesterday’s low)
Target = 124.60 (just above 200-day MA)
Stop = 131.75 (above last week’s high and daily downtrend line)
Shares = 300

Notes = We sent an intraday e-mail alert that we were stalking this setup for potential short entry yesterday, but it did not hit our trigger price. As mentioned in the commentary and illustrated on the chart above, the daily downtrend line in MDY is still intact. As such, we must assume the downtrend that has been in place for 3 months will continue. However, we will only short this on a break below yesterday’s low.

We also continue to stalk QQQQ for a potential long entry, which would be the other scenario if MDY and the broad market does NOT correct from here. If we buy QQQQ, we will send an intraday e-mail alert, but the entry point is not clear at this point.

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 = + $420

Closed positions (since last report):

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

$30,015

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