The Wagner Daily | November 22, 2005

Commentary:

The broad market kicked off the holiday-shortened week with another day of solid gains, as the Dow Jones Industrials moved into positive territory for the year. Stocks spent most of the session trading in a narrow, sideways range, but buying interest during the final ninety minutes once again lifted most sectors to decent closing gains. As we typically see during strong markets, small cap stocks led the way higher and the Russell 2000 Index gained 1.0%. The S&P Midcap 400 Index followed closely behind with a 0.9% advance. The Nasdaq Composite gained 0.7%, while both the S&P 500 and Dow Jones Industrial Average closed 0.5% higher. Each of the major indices closed near their intraday highs, a continued sign of institutional support into the close.

Unlike the prior two days in which turnover increased while the market rallied, total volume fell in both exchanges yesterday. Volume in the NYSE declined by 14%, while volume in the Nasdaq was 16% lighter than the previous day’s level. Despite the drop in activity, advancing volume exceeded declining volume by a positive ratio of 2 to 1 in both exchanges. As you might expect, turnover will probably continue to decline as we approach the Thanksgiving holiday on Thursday. Thanksgiving week historically consists of reduced trading activity due to traders taking a few days off before the holiday.

Gold and silver stocks continued to build on last week’s impressive gains, as Spot Gold gained $5 and closed at a new 17-year high of more than $490 per ounce. This resulted in another 2.8% surge in the Gold Mining Index ($GOX), which has advanced nearly 10% within the past four sessions! Fortunately, we remain long our full position of GLD from last week’s entry, but it may soon be time to take some profits into strength. Spot Gold’s lack of prior overhead price resistance has enabled it to rally sharply in a short period of time, but it is likely the commodity will at least pause and probably correct as it approaches the $500 level within the next few days. Although $500 is not a magic number that represents any real area of technical resistance, the number does provide a big level of “psychological resistance.” Retail investors tend to place stops at large, round numbers because they anticipate resistance at such levels, especially with prices that represent the next hundred dollar mark ($100, $200, $300, et cetera). As such, the placement of stop orders at these large, round numbers does indeed create resistance, which makes the whole expectation of resistance become a self-fulfilling prophecy. This being the case, you may want to tighten stops on any gold or silver stocks you are swinging on the long side. As regular subscribers will note below, we have tightened our stop on GLD as well. We also plan to sell at least half of our position size into strength if Spot Gold makes a run at $500 (or $50 for GLD).

As mentioned in yesterday’s Wagner Daily, most of the major indices are trading at new multi-year highs. A few indices such as the S&P Midcap 400 Index are even sitting at record highs. The lack of overhead supply from any prior highs means that odds favor higher stock prices in the intermediate-term. However, we want to emphasize that the Nasdaq, S&P, and Dow have each become quite extended away from support of their 20-day moving averages. As such, it is likely we will soon see a short-term correction either through consolidation or a price retracement. Just so you are prepared and not caught off guard, let’s take a quick look at where you can expect the S&P and Nasdaq to find support in the event of a retracement in the next day or two. We’ll begin with the daily chart of the S&P 500:

Looking at the chart above, you will notice the blue dotted horizontal lines above that indicate new support from the prior highs. This area would be the first place where the S&P could drop to before it recovers to resume the uptrend. But if the 1,243 level is broken, look to the 10-day moving average for support (currently at 1,234). In steadily trending markets, the 10-day MA works great at preventing you from prematurely exiting a winning position. As long as the stock or ETF remains above the 10-day MA, being long is usually the right thing to do.

Just like the S&P, the Nasdaq is at a four-year high that provides no overhead resistance. Short-term support is the prior highs from August, with the 10-day MA providing further support below that. Take a look at the daily chart of the Nasdaq below:

Remember that the U.S. equities markets will be closed this Thursday, November 24, for the Thanksgiving holiday. The next two days leading up to that will probably consist of reduced volume and the increased chop and indecision that usually accompanies a drop in turnover levels. Don’t overtrade this week and consider focusing on your existing positions right now rather than entering new ones.

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):

stop 47.75

unrealized P/L = + $2,010

TLT long (500 shares from Nov. 16 entry) –
bought 89.87, stop 88.89, target 92.15, unrealized points = + 0.54, unrealized P/L = + $270

Closed positions (since last report):

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

$94,195

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