The Wagner Daily | December 8, 2005

Commentary:

The major averages experienced some give back yesterday as intraday trendline breaks in the S&P and Dow sent the markets noticeably lower by the close of trade. The Dow got clipped by 45.95 (0.42%), the Nasdaq Composite shaved off 8.75 points (0.39%) and the S&P took a haircut (just a little off the top please, don’t touch the back…) of 6.33 points for a percentage loss of 0.50%. What started out as a complete tug of war in the earlier part of the session turned into a field day for sellers later on as distribution accelerated. At the 11am mark overall volume on the NYSE was running 17% lower than it was at 11am on Tuesday. On the Nasdaq, the same figure was off by 6%. Total turnover at the close, however, was only off 1% on the NYSE and 3% on the Nasdaq clearly showing the increase in selling later in the session. Take a look at the chart of the Dow below to better understand how breaks of trendlines make one entire set of traders and investors suddenly wrong and force them to reverse their positions en masse.

Notice how until the trendline breaks there are obviously a large number of market participants who think that the market will turn upwards. They are battling it out with the bears causing the tight range that you see in the area labeled number 1. Once the trendline breaks, we get the aforementioned increase in overall volume and the large body candle (2) that signals an increase in emotion (volume) as new shorts pile in and former bulls realize immediately that their earlier assessment of direction was wrong and must sell their holdings.

One of the catalysts for the selling was some extreme relative weakness in the Homebuilders Sector. Several reports of weakness in the sector hit the presses on Wednesday including a monthly survey from Credit Suisse First Boston which said in part, “it is difficult to get a definitive read on a market during the slow winter months . . . prices are climbing in only select markets and price points, incentives are more prevalent than is seasonally typical, and demand from investors is abating or shifting to lower cost areas like Texas. As several markets cool off, it appears that the ramifications of the speculative euphoria in 2004 and 2005 are starting to materialize, as inventories have crept up concurrent with slowing home price appreciation.” This was enough to start the selling and push the sector off by over 3%. Notice how much of an “outlier” the builders are when listed against other important sectors which make up large parts of the S&P 500. Its very obvious that none of them even come close to the 3.3% loss that the builders experienced yesterday.

Going forward we are looking at the possibility of further downside in this beleaguered sector. Lennar Corp. (LEN) was an MTG Stalk Sheet play yesterday morning as a short which is already in the money by $1.17 from its first entry point. The chart below of the $DJUSHB, showing its imminent trendline break which should send the sector lower. Remember that although there is no ETF which groups the builders, a synthetic basket can be made up on your own of leading names such as RYL, TOL, HOV, PHM, MTH, LEN, CTX, DHI, KBH or TOA. If the index loses that trendline either tomorrow or within the next few trading sessions, the odds would put the next stop for the index at 850 (mid November support) and then at 800 for a retest of October lows. Prices simply move along the path of least resistance. When trendlines are broken, prices will naturally pull towards the next pivot.

As we stated in yesterday’s publication, Gold “continues to shine” and yesterday was no exception. Check the sector list snapshot above to see that the $GOX was leading the pack again. Newmont Mining (NEM) which we purchased Tuesday via intraday alert to Stalk Sheet subscribers gapped up fiercely yesterday adding to its gains.

EDITOR’S NOTE: In yesterday’s Wagner Daily, we incorrectly stated that the Nasdaq experienced a “distribution day” on December 6. However, because the index closed marginally higher and volume increased 9%, it was technically a bullish “accumulation day” and NOT a “distribution day.” Nevertheless, the fact that the Nasdaq closed at its intraday low and gave back most of its gain on December 6 was bearish and basically invalidated the “accumulation day.” We apologize for any confusion caused by this typo.

Today’s Watchlist:

There are no new setups for today. We are remain short DIA which has moved in our favor strongly on yesterday’s weakness and have lowered our stop to decrease risk. We are currently scanning for new ETF plays for the coming trading 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 109.65

unrealized P/L = + $244

Closed positions (since last report):

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

$43,462

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