The Wagner Daily | December 5, 2005

Commentary:

The major indices closed with mixed results last Friday, as both the S&P 500 and Dow Jones Industrial Average broke their five-week winning streaks. The S&P oscillated in a narrow trading range of less than six points on Friday’s session before finishing unchanged. The S&P Midcap 400 and small-cap Russell 2000 indices each closed flat as well. Strength in the tech and biotech-related sectors enabled the Nasdaq Composite to show relative strength and gain 0.3%. The Dow Jones, conversely, fell 0.3% for the day. The S&P 500 lost 0.3% for the week, while the Dow shed 0.5%. The Nasdaq Composite, however, logged its seventh straight week of gains by advancing another 0.5%. The index also closed out the week at a new four-year high.

Total volume in the NYSE declined by 14% in last Friday’s session, while volume in the Nasdaq was 13% lower than the previous day’s level. Market internals were mixed. Because most of the indices closed near the flat line and held on to their previous day’s gains, Friday’s session could be interpreted as a consolidation day. As such, the decline in volume was positive because it showed that the bears did not take advantage of the opportunity to unload shares into the prior day’s rally. If volume had increased, it would have indicated bearish “churning” action. Regardless, the broad market still experienced two bearish “distribution days” last week, which certainly warrants a bit of caution on the long side this week.

One of last week’s most important sector performances was given by the Semiconductor Index ($SOX), which vaulted 4.3% higher to finish at a fresh 52-week high. As you may recall, we were monitoring both the $SOX index and SMH (Semiconductor HOLDR) for a potential breakout of sideways consolidation in the beginning of last week. Like textbook, the breakout occurred on Thursday and both $SOX and SMH added a little more to the breakout on Friday. Without a doubt, last week’s strength in the Semiconductors was largely responsible for the Nasdaq locking in another week of gains. Because the Semis are so heavily weighted, the Nasdaq tends to follow the direction of the $SOX. If the $SOX would not have broken out of its range, the Nasdaq would have finished the week in the red. This is why we pay so much attention to and frequently discuss the performance of the Semis. The daily chart of the $SOX below illustrates the breakout from its nearly two-week consolidation:

The S&P 500 fell below its 22-day uptrend line with last Wednesday’s selloff. Since then, it has attempted to recover, but is now running into resistance of that prior uptrend line. This is a good example of how a prior support level becomes the new resistance level after the support is broken. We have circled this new area of trendline resistance on the daily chart of the S&P below:

The break of that steep uptrend line, combined with the first correction in six weeks, could provide the impetus to see further broad market correction in the coming week. At the very least, the weekly charts indicate that we will probably see at least a sideways consolidation in many sectors this week. However, don’t forget that the major indices are all trading at or near multi-year highs. Therefore, there is technically not a lot of resistance created by overhead supply. Like water running down a hill, the stock market always follows the path of least resistance. As long as the bears stay away, even a minor amount of buying pressure could enable the markets to advance higher in the coming days, regardless of whether or not stocks are looking a bit overheated. Our bias remains bullish overall, but we are very cautious about entering new positions on the long side this week (except perhaps within the $SOX). Instead, you may be better off to focus on managing existing open positions.

Today’s Watchlist:

There are no new plays for today. Instead, we prefer to see how the market reacts to last week’s corrective action in the S&P over the next few days.

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 204.66

unrealized P/L = + $177

Closed positions (since last report):

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

$31,227

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