The Wagner Daily | November 21, 2005

Commentary:

Stocks followed up the previous day’s strong rally with another session of higher volume gains last Friday. The major indices showed weakness in the morning session, but the bulls provided support in the afternoon and enabled the broad market to close modestly higher. The S&P 500 and Dow Jones Industrial Average each gained 0.4%, while the Nasdaq Composite advanced 0.3%. The small cap Russell 2000 once again showed relative strength by rallying 0.7%, but the S&P Midcap 400 only moved 0.2% higher. Each of the major indices finished in the upper third of their intraday ranges, which also means that most stocks closed last Friday near their best levels of the week. The Nasdaq Composite and S&P 500 both rose 1.1% for the week, as the Nasdaq locked in its fifth consecutive week of gains. The Dow Jones Industrials gained 0.7% for the week.

Total volume in the NYSE increased by 7% last Friday, while volume in the Nasdaq was 9% higher than the previous day’s level. This means that both the S&P and Nasdaq registered their second consecutive “accumulation days,” indicating institutional demand is alive and well. Note, however, that part of the volume increase was likely due to the fact that Friday was monthly options expiration day. As of mid-day, it appeared that the broad market was conversely headed for a bearish “distribution day” because volume was running higher and most of the indices were trading lower. But Friday’s afternoon rally reversed that scenario. Market internals were bullish, as advancing volume exceeded declining volume by approximately 2 to 1 in the NYSE and slightly less in the Nasdaq.

The Semiconductor Index ($SOX), which had been showing relative weakness throughout this month’s rally, sprung to life on Friday and ripped 2.5% higher. This was largely fueled by the 13% gain in semi chip maker Marvell Technology Group (MRVL). The gain in the $SOX was important because we felt that weakness in the sector was the one element that could prove to be troubling for the Nasdaq. But based on Friday’s action, it appears the $SOX is now going to play “catch up” to the relative strength we have seen in the Biotech and Internet sectors. As the chart below illustrates, Friday’s gap put the index above its prior closing high from October 3. The $SOX is now less than 2% below its prior 52-week of 486, so we will probably see a new high in the index this week:

Although the $SOX is starting to look much better, SMH (Semiconductor HOLDR) is still trading below its primary downtrend line that has been in place since the high of August 2. This can be attributed to the fact that only 20 stocks comprise SMH, with MRVL not being one of them. Because $SOX and SMH are currently NOT trading in sync with each other, be sure to analyze each charts independently, rather than blindly buying SMH just because the $SOX breaks out to a fresh high. Notice how the downtrend is still intact in SMH:

In the November 18 issue of The Wagner Daily, we noted that the Nasdaq Composite had closed at a new 4-year high, but the S&P 500 was still trading below its prior high from August 3. However, Friday’s 0.4% gain enabled the index to close at a fresh 4-year high as well! The daily chart of the S&P below illustrates how the index closed above resistance of its prior high of 1,245. That prior horizontal resistance level should now act as the new support on any pullback today:

The action in the S&P Midcap 400 Index (and MDY) is even more impressive because it is once again trading at a record high with no prior resistance levels:

Our overall intermediate-term bias remains on the long side of the market because several of the major indices are trading at new highs and have no overhead supply to deal with. However, given that the Nasdaq has had five straight weeks of gains, we would not be surprised to see a short-term correction from current levels. If this happens, we would view the correction as a buying opportunity in the sectors that have been showing the most relative strength (gold, biotech, internet, financials, and now semiconductors). If you’re currently long, be sure to trail stops in order to protect your gains in the event of a correction. As for the short side, we see no low-risk opportunities for swing traders because the broad market is no longer in a downtrend. Although we could drop for a few days, fighting the overall trend always presents a negative risk/reward ratio. You will probably have better odds of success by waiting for any correction to subside and then buying the market instead.

Today’s Watchlist:

There are no new setups for today because we are near our maximum equity exposure of $100,000 (based on the position model).

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 = + $1,486

TLT long (500 shares from Nov. 16 entry) –
bought 89.87, stop 88.89, target 92.15, unrealized points = + 0.27, unrealized P/L = + $135

Closed positions (since last report):

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

$93,530

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