The Wagner Daily | December 14, 2005

Commentary:

To nobody’s surprise, Greenspan and the gang raised the Federal Funds interest rate to 4.25% yesterday afternoon, but stocks reacted positively nevertheless. More important than the quarter-point rate hike were the accompanying comments that implied future rate hikes would become less frequent. As we typically see on Fed day, stocks spent most of the session trading in a narrow, sideways range, then became volatile after the 2:15 pm EST Fed announcement. Both the S&P 500 and Dow Jones Industrial Average rallied late in the afternoon and gained 0.5% by the close, but the Nasdaq Composite finished only 0.2% higher. Small and mid-cap stocks, often an accurate barometer of broad market health, lagged behind the other indices. The S&P 400 managed only a 0.1% gain and the Russell 2000 actually lost 0.1%. All of the indices closed off their intraday highs and near the middle of their respective ranges.

Although turnover was light throughout the first half of the day, it spiked substantially after the Fed announcement. Total volume in the NYSE showed a meaty 27% increase, while volume in the Nasdaq was 15% higher than the previous day’s level. The broad market gains on higher volume enabled both the S&P and Nasdaq to register a bullish “accumulation day” that signified institutional buying interest. However, it was a bit disconcerting that small and mid-cap stocks showed relative weakness because every recent broad market rally has been led by small and mid-caps. Market internals were also negative in the Nasdaq, adding to the mixed signals of yesterday’s stock market health. Advancing volume exceeded declining volume by a ratio of 3 to 2 in the NYSE, but declining volume in the Nasdaq was fractionally higher than advancing volume.

Of the twenty-four major industry sectors we follow on a daily basis, five gained more than 1% yesterday, while two lost more than 1%. Showing relative strength were: Pharmaceuticals ($DRG), Home Construction ($DJUSHB), Banking ($BKX), Utilities ($DJU), and Healthcare ($HCX). On the downside, both the Airline Index ($XAL) and Oil Service Index ($OSX) fell more than 1%. Of these, the 1.7% gain in the Pharmaceutical Index caught our attention the most.

In the December 6, 2005 issue of The Wagner Daily (click to review it), we provided an early heads-up to a potential bullish reversal that we felt was setting up in the $DRG Index. From December 6 – 12, the Pharmaceutical Index continued to chop around in a narrow range, but yesterday’s surge caused the $DRG to break out above its downtrend line (which has now become the new support level). From here, we expect the $DRG to consolidate and eventually break out above its prior high of November 11. Because the index recently formed a double bottom on its daily chart, a breakout above the November 11 high would technically signify the “higher high” that is necessary in order to confirm a trend reversal. The big question, however, is how high will the $DRG Index go? Unlike an index or stock that is trading at a new 52-week high, the $DRG still has a lot of prior price resistance and overhead supply that is associated with it. Therefore, it would be unrealistic to assume the index will simply blast off in the same manner that GLD (Gold Trust) did over the past two weeks. It’s possible, of course, but not likely. When an index is reversing its trend, Fibonacci is one of the best technical analysis tools for predicting the extent of the retracement. The daily chart of $DRG below illustrates yesterday’s break of the 3-month downtrend line, as well as the Fibonacci retracement levels:

Notice how the 38.2% Fibonacci retracement level converges with resistance of the November 11 high. Such a convergence clearly marks that 315 level as being a major area of resistance. However, $DRG will likely rally at least to its 61.8% Fibo retracement if it clears the 38.2% level. Interestingly, the 61.8% level roughly converges with resistance of the 200-day moving average, so that 200-MA makes an ideal upside target for the sector. Regular subscribers will see we are correspondingly stalking PPH (Pharmaceutical HOLDR) for a potential long entry today.

As for the broad market, yesterday’s rally put the S&P 500 and Nasdaq within easy striking range of their November highs and fresh 52-week highs as well. The closing high in the S&P is 1,268 and the prior intraday high is 1,272. Therefore, expect to find some resistance between that range. But if the S&P clears 1,272, it could rally sharply due to the lack of overhead supply and a new multi-year high. Support will be found between 1,256 (20-day MA) and 1,258 (yesterday’s low).

In the Nasdaq, 2,273 marks the prior closing high that was set on December 2. Resistance of the prior intraday high is at 2,278 and was set on December 6. Support is between 2,244 (20-day MA) and 2,255 (yesterday’s low). We recommend you set alerts for these pivotal levels on both the S&P and Nasdaq because stocks are likely to remain on the lethargic side UNLESS either the S&P or Nasdaq clearly break out to new highs. Conversely, a break of the aforementioned support levels could trigger a change in our overall market bias.

Today’s Watchlist:

PPH – Pharmaceutical HOLDR
Long

Trigger = below 67.50 OR above 68.20 (whichever comes first)
Target = 71.70 (resistance of 200-day MA)
Stop = 66.35 (below yesterday’s low)
Shares = 400

Notes = As detailed in the commentary above, we are looking to take advantage of a potential trend reversal in the Pharmaceutical sector. Our entry in PPH will be either below 67.50 (a minor retracement of yesterday’s move) or above 68.20 (a rally above the prior closing high), whichever price comes first.

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):

Closed positions (since last report):

net P/L = + $6

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

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