The Wagner Daily | January 5, 2006

Commentary:

The broad market traded in a relatively dull, sideways range throughout yesterday’s session, but the major indices nevertheless built on their previous day’s strong gains. The S&P 500 gained 0.4%, the Dow Jones Industrials 0.3%, and the Nasdaq Composite 0.9%. Small and mid-cap stocks also kept pace, as the Russell 2000 advanced 0.8% and the S&P 400 moved 0.7% higher. Although the trading range was narrow, each of the major indices finished near their intraday highs, a positive sign of institutional support. Our short position in IWM stopped out for a small loss yesterday, but the long position in PPH continued to build on its gains.

Total volume in the NYSE declined by 5% yesterday, while volume in the Nasdaq was 4% lighter than the previous day’s level. It was bullish that stocks built on their previous day’s gains, but it would have been better if volume had risen as well. Still, volume in both exchanges remained above 50-day average levels. Market internals were decent, as advancing volume outpaced declining volume by nearly 5 to 2 in the NYSE. In the Nasdaq, the ratio was positive by more than 3 to 1.

One sector that has suddenly begun to show a lot of strength are the Chinese stocks. Both tech and industrial-related Chinese stocks began to blast out of bases two days ago. This resulted in a corresponding breakout in FXI, the ETF that mirrors the Xinhua 25 (mainland China’s equivalent of the Dow Jones Industrials). FXI has been in a steady long-term uptrend since it was launched in 2004, but it had been in an intermediate-term downtrend for the past five months. However, the strength of the past two days enabled FXI to break out above its intermediate-term downtrend line. Because the weekly uptrend remains intact, we now expect a test of and possible breakout to a new all-time high in the coming weeks. The break of the intermediate-term downtrend line is illustrated on the weekly chart below:

FXI is the only ETF that tracks the mainland Chinese markets because iShares EWH is correlated to the Hong Kong market. CHN (China Fund) is technically not an ETF, but is a closed-end management investment company that trades like an ETF. CHN traded 400% greater than its average daily volume yesterday and has rallied more than 11% over the past two days. It is now poised to break out above a two-year downtrend line, as illustrated on the long-term monthly chart below:

Of the five major indices we track on a daily basis, two of them, the S&P 500 and mid-cap S&P 400, set new multi-year closing highs yesterday. The broad-based S&P 500 closed at 1,273, less than one point higher than its prior closing high from December 14, but still enough to qualify as a new four-year closing high. The blue horizontal line on the chart below marks the prior closing high from December 14:

Although the S&P 500 set a new closing high, notice there is still minor overhead supply from the intraday highs of December 14 – 16. On those days, the index traded up to nearly 1,276. Regardless, odds are good the S&P 500 will at least probe above that level in the coming days. If it manages to close firmly above 1,276, we could see a very strong rally ensue due to the complete lack of overhead resistance. Such a breakout would also put the index above its 61.8% Fibonacci retracement level that we discussed in the January 3 issue of The Wagner Daily.

Even more impressive is the recent performance of the mid-cap S&P 400 Index, which broke out of a narrow, seven-week base of consolidation and closed at an all-time high. It also closed above all intraday highs from December, indicating a clear break out to a new high:

Traders wishing to take advantage of the breakout in the S&P 400 may consider trading MDY, the primary ETF that mirrors the S&P 400 Mid-Cap Index. SPY is obviously the ETF that tracks the S&P 500 Index.

As for the other indices, the Nasdaq Composite did not yet rally above its December high, but is only ten points (0.4%) away. The small-cap Russell 2000 Index is even closer to its prior high. It only needs to close two points higher than yesterday in order to set an all-time closing high like the S&P 400. The Dow Jones, as usual, continues to lag behind the most.

Today’s Watchlist:

BBH – Biotech HOLDR
Long

Trigger = above 206.45 (above yesterday’s high)
Target = new highs (will trail a stop)
Stop = 200.70 (below 20 and 50-day MA support)
Shares = 100

Notes = As discussed in yesterday’s Wagner Daily, we like the bullish consolidation near the high in BBH and expect a breakout to new highs. Note, however, that we are only looking to buy a small position due to high volatility and the corresponding wide stop that is required for this setup. Please adjust your personal share size accordingly if you take this trade.

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 69.70

unrealized P/L = + $620

Closed positions (since last report):

net P/L = ($300)

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

$35,795

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