The Wagner Daily | November 16, 2005

Commentary:

The broad market trended higher throughout yesterday morning, but the bears arrived and spoiled the party in the afternoon. As such, each of the major indices finished the day lower as volume increased across the board. Small cap stocks saw the biggest losses, with the Russell 2000 Index losing 1.2% yesterday. The Nasdaq Composite shed 0.6%, the S&P Midcap 400 lost 0.5%, and the S&P 500 fell 0.4%. After initially probing above its 10,720 resistance level we illustrated in yesterday’s Wagner Daily, the Dow Jones Industrials reversed to finish the day 0.1% lower.

Although yesterday’s losses were not that bad on a percentage basis, it is important to realize that shares fell on higher turnover in both exchanges. Total volume in the NYSE increased by 16%, while volume in the Nasdaq was 21% higher than the previous day’s level. The higher volume losses resulted in a bearish “distribution day” for both the S&P and Nasdaq. It was the Nasdaq’s first day of confirmed institutional selling in three weeks, but was the third “distribution day” for both exchanges within the past four weeks. Nevertheless, an occasional day of institutional selling within the context of a rally is normal and can usually be absorbed in a healthy market. However, a string of “distribution days” within the next one to two weeks would serve as a clear warning sign to the bulls. As always, we will continue to closely monitor the relationship between price and volume in order to determine what is really happening “under the hood” of the stock market.

Unlike most of the down days in the first half of this month, yesterday’s selloff even affected the strong industry sectors that have been leading the current rally. Sectors including Biotech, Internet, Semiconductors, and Financials all corrected significantly yesterday, while no individual sectors stood out as strong performers. The broad-based losses resulted in our BBH (Biotech HOLDR) position hitting its tight trailing stop, but we locked in a gain of 8.55 points in the process. BBH still looks quite bullish on its daily and weekly charts, but it is likely to consolidate for a while before going much higher. As long as its uptrend remains intact, we will be stalking BBH for a potential re-entry point over the next several weeks. The Gold and Silver Mining Index ($XAU) dropped yesterday, but the price of Spot Gold (and our long position in GLD) held up well.

Taking an updated look at the daily chart of the S&P 500, you will see that the index reversed yesterday after running into resistance of its primary downtrend line from the high of August 3. As you may recall, the S&P recently broke out above its steeper, shorter-term downtrend line from its September 12 high, but the downtrend line that begins with its 52-week high is more significant because it has been in place longer. Looking at the chart below, you will see two separate downtrend lines. The blue one marks prior resistance (new support) of a downtrend the index rallied above earlier this month, but the red downtrend line shows the current resistance level that SPY traders are closely watching right now. We removed the moving averages so that you can see the trendlines more easily:

There is a good chance the primary, three-month downtrend line will continue to act as resistance from here and will likely result in either a correction by price (retracement) or correction by time (sideways consolidation). If the former occurs, expect the S&P to find support at its prior downtrend line from the September 12 high because prior resistance always becomes the new support after the resistance is broken. This would make the 1,200 level a key support area from which you could consider covering any new short positions and possibly re-entering the long side of the market. But if the index trades sideways instead, it would be more bullish than a price retracement and would probably result in a breakout to a new 52-week high within the coming months. Either way, use caution on new trade entries while the S&P 500 remains at such a pivotal level. As we showed you yesterday, the Dow Jones is at an equally pivotal level due to major horizontal price resistance at the 10,720 level. For the long side, the Nasdaq 100 Index (and QQQQ) continues to have the best chart pattern of the major indices and is still holding near its 52-week high.

Today’s Watchlist:

TLT – iShares 20-year T-bond fund
Long

Trigger = above 89.85 (above the Nov. 11 high and daily downtrend line)
Target = 92.15 (resistance of its 200-day MA)
Stop = 88.69 (below yesterday’s low)
Shares = 500

Notes = The fixed-income bond ETFs, and TLT in particular, are poised to break resistance of their daily downtrend lines. With TLT, we are only looking to play a short-term counter-trend bounce up to a resistance level, so we don’t intend to be in the trade for more than a week or so (if it triggers). Our entry point is above the daily downtrend line illustrated on the chart above.

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 = ($70)

Closed positions (since last report):

net P/L = + $639

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

$32,683

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