The Wagner Daily | November 10, 2005

Commentary:

After continuing the four-day consolidation throughout the first half of the session, the major indices broke out at mid-day, but selling pressure later in the afternoon caused the broad market to drift back down into the prior trading range. Nevertheless, the S&P 500 and Nasdaq Composite both eked out gains of 0.2%, while the Dow Jones Industrial Average closed less than 0.1% higher. The S&P 400 Midcap Index advanced 0.4% and the Russell 2000 moved 0.6% higher. Each of the major indices closed near the middle of their intraday ranges, positioning the broad market for further indecision going into today.

Total volume in the NYSE increased by 14% yesterday, but volume in the Nasdaq was only 1% higher than the previous day’s level. This technically means that yesterday was a bullish “accumulation day” in both the S&P and Nasdaq, though it was not exactly positive that both indices gave back about half of their intraday gains. Advancing volume exceeded declining volume by a ratio of approximately 3 to 2 in the NYSE, but the Nasdaq internals were positive by only a small margin.

Taking a look at yesterday’s sector performance, you will see that the Semiconductor Index ($SOX) rallied 1.4% and closed back above its 50-day moving average for the first time since October 4. This, of course, is positive for the Nasdaq, but the $SOX remains in “no-man’s land” because it is still in the middle of its range from the October selloff. There are a handful of individual semiconductor stocks that are consolidating near their highs and looking good for long entry, but SMH, the most popular ETF that tracks the Semiconductor sector, is not a buy setup at its current level. SMH could move higher for a few more days, but resistance of its downtrend line from the August 2 high is only about one point above yesterday’s closing price of $35.71. The weekly chart of SMH below shows how it found support at its 200-week MA last month, but has resistance of its downtrend line from the August high. As you can see, it is really in “no-man’s land” right now and should be left alone unless only daytrading it:

Conversely, BBH (Biotech HOLDR) continues to act great and is holding at its five-year high. The consolidation of the past several days is bullish because it enables BBH to build a base of support from which it can spring to new highs. Stocks and ETFs that are trading at 52-week highs generally continue higher simply due to the lack of overhead supply. As such, we remain long BBH with a marked to market gain of 4.8 points, but only intend to take the profit when BBH eventually hits our trailing stop. Trying to guess how high an ETF will go when it is sitting at a new high is a bad idea and usually results in taking profits too early. Trailing a stop based on a trendline break helps to maximize your profit while protecting your gain. Below is a daily chart of BBH:

In addition to Biotechs, the Gold and Silver Sector ($XAU) is once again looking bullish as well. After a modest correction from its multi-year high in September, the $XAU index is now ready to resume its weekly uptrend that has been in place since May 2005. The $XAU index surged 3.1% higher yesterday after it rallied above convergence of its 20 and 50-day moving averages. Yesterday’s closing price of 109.30 caused the index to finish right at resistance of its daily downtrend line from the September 30 high:

Looking at the longer-term weekly chart of $XAU, you will see that the primary uptrend line from the May low remains perfectly intact:

Based on the charts above, we like the idea of buying the gold and silver sector at current levels. As you may recall, we netted a large profit from our long position in GLD (Gold Trust) last month and are once again looking for an entry in that ETF. Unfortunately, the chart of GLD is more choppy and not as clear as that of the $XAU, but that is because GLD tracks the actual price of spot gold and $XAU is based on the prices of gold and silver mining stocks. The two usually trade in sync with each other, but not always. Therefore, you may want to consider creating your own “synthetic ETF” for the gold/silver mining sector by trading a basket of the leading individual stocks. We feel the best looking charts in that sector include: GLG, GFI, PDG, and SSRI.

As for the broad market, it has now traded in a relatively narrow, sideways range for the past five days. The longer a market consolidates in a narrow range, the more powerful the move will be when it eventually comes, but the big question is which direction will it go? It’s difficult to say due to divergence among the major indices. As we have recently discussed, the Nasdaq 100 (and QQQQ) is testing its 52-week high, but other indices such as the S&P 400 Midcap Index technically remain in a downtrend. Both the S&P 500 and Dow Jones Industrials also ran into resistance of their prior highs from September, which counteracts the bullish looking Nasdaq charts. Rather than attempting to place aggressive bets on the direction of the broad market, consider trading individual sectors with relative strength or weakness instead. Biotech and Gold looks good on the long side, while Home Construction and Energy (former market leaders) are potential shorts.

Today’s Watchlist:

There are no new setups for today, as we will focus on managing the two existing positions instead.

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):

stop 194.20

unrealized P/L = + $728

MDY short (300 shares from Nov. 8 entry) –
shorted 129.89, stop 131.75, target 124.60, unrealized points = (0.57) , unrealized P/L = ($171)

Closed positions (since last report):

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

$69,460

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