The Wagner Daily | December 20, 2005

Commentary:

The broad market traded in a benign, sideways range throughout the first half of yesterday, but the bears promptly took control in the latter half of the session. After trending steadily lower throughout the afternoon, each of the major indices finished “in the red” and at their worst levels of the day. Losses were moderate in the S&P 500 and Dow Jones Industrials, which closed lower by 0.6% and 0.4% respectively, but losses were much worse in the tech and small-cap arenas. The small-cap Russell 2000 Index, which we highlighted as a potential short candidate yesterday morning, dropped 1.6% and continued to show the most relative weakness. As such, our new short position in IWM is already looking pretty good. The Nasdaq Composite performed equally poorly, as the index lost 1.3% yesterday. The mid-cap S&P 400 Index fell 1.1%.

The one positive of yesterday’s session is that turnover levels receded in both exchanges. Total volume in the NYSE declined by 21%, while volume in the Nasdaq was 29% lower than the previous day’s level. The drop in broad market volume prevented the formation of another “distribution day,” which is positive, but remember that last Friday’s high volume was also skewed by quarterly “quadruple witching” options expiration day. Market internals were also bearish yesterday. In the Nasdaq, declining volume exceeded advancing volume by a margin of 4 to 1, while the ratio was negative by approximately 5 to 2 in the NYSE. Institutional selling may not have been in full effect, but there certainly was a lack of buying interest to prop things up. Yesterday’s negative market performance was simply the outcome of the recent and numerous “distribution days” we have been warning subscribers about.

Many industry sectors turned in sharp losses yesterday, while only one stood out on the upside. Positive news for pharmaceutical giant Pfizer enabled the drug sector ($DRG) to zoom 2.6% higher yesterday. Obviously, we were quite pleased with the action because we were long PPH (Pharmaceutical HOLDR) going into yesterday. As you may recall, we bought PPH on December 14 when it broke out above technical resistance. As of now, the open position is showing a marked-to-market gain of nearly 3 points. However, regular subscribers should note the new trailing stop price in the Daily Performance Report below.

Aside from the healthcare-related sectors, all the other industries we follow closed with losses yesterday. The Home Construction sector ($DJUSHB) fell 2.2% and was one of three major industry sectors that shed more than 2%. The other two sectors were Semiconductor ($SOX) and Biotech ($BTK), hit with losses of 2.3% and 2.1% respectively.

In the December 16 issue of The Wagner Daily, we mentioned that both the $SOX and $BTK sectors were holding in bullish consolidation patterns and were likely to lead the Nasdaq higher if their consolidation patterns led to upside breakouts. However, both sectors have since fallen below support of their channels of consolidation and are no longer looking so hot on their daily charts. The $SOX is now trading well below prior support of its daily uptrend line from the October low and has also fallen below its 20-day moving average. Worse is that the $SOX has fallen below support of its consolidation that began when the index bounced off support of its uptrend line on December 9. In a healthy market, the $SOX consolidation of the past week should have led to new highs and a resumption of the primary uptrend. Instead, it went the opposite direction:

The $BTK index looks equally negative on its daily chart, as the index closed below support of a five-week sideways consolidation yesterday. Like the $SOX, it has also broken below support of its prior uptrend line, which will now act as resistance on any rally attempt:

Needless to say, traders who are long BBH or SMH should be very careful here and might consider selling into strength on any bounce. If the weakness in these two sectors continues, it will undoubtedly drag down the Nasdaq as well. We have noticed that more and more sectors are beginning to set up for entries on the short side, but we are not aggressively looking to enter new positions because it is a holiday week. For now, we are comfortable with being short IWM and long PPH. Being short a sector with relative weakness and long a sector with relative strength is a great way to minimize your risk in a market that is showing mixed signals.

Today’s Watchlist:

There are no new plays for today, so we will focus on managing our existing open positions.

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):

new stop 70.42

unrealized P/L = + $1,112

IWM short (300 shares from Dec. 19 entry) –
shorted 67.57, stop 68.90, target 64.25, unrealized points = + 0.57, unrealized P/L = + $171

Closed positions (since last report):

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

$48,500

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