The Wagner Daily | January 6, 2006

Commentary:

Like the previous day, stocks drifted in a sideways range throughout the day, but only the tech-heavy Nasdaq registered gains. The S&P 500, Dow Jones Industrial Average, and mid-cap S&P 400 indices were each unchanged and closed near the middle of their intraday ranges. The Nasdaq Composite, however, showed relative strength by gaining 0.6% and closing at its intraday high. The Nasdaq’s gain enabled the index to set a new four-year closing high, although the December 6 intraday high is still two points above yesterday’s close. The small-cap Russell 2000 Index gained 0.4%.

The changes in yesterday’s volume levels were as uneventful as the broad market’s trading activity. Total volume in the NYSE declined by 2%, while volume in the Nasdaq was 1% lower than the previous day’s level. Because the S&P 500 was flat and volume in the NYSE was nearly unchanged, yesterday’s price to volume ratio does not tell us much. But considering that stocks held on to their gains from the prior two days and the Nasdaq outperformed, one could assume that yesterday’s market action leaned to the bullish side overall. This is further confirmed by the fact that the NYSE market internals were flat, but advancing volume exceeded declining volume by nearly 3 to 1 in the Nasdaq. That the major indices did not succumb to bearish churning action after two days of gains is also positive.

The Semiconductor Index ($SOX), which was trading near the lows of its range only a few days ago, popped to a new 52-week closing high yesterday. As the 50-day moving average rose to provide support coming into the new year, the $SOX suddenly began to wake up and show relative strength. The sector has gained more than 6% over the past three sessions and has been largely responsible for pulling the Nasdaq along with it. Remember that the Nasdaq usually tends to follow the $SOX index because semiconductor stocks are so heavily weighted. Therefore, it is definitely a positive that the semis have begun to once again show relative strength. SMH (Semiconductor HOLDR) also closed at a new 52-week high yesterday, but ideally we would prefer to see it consolidate for a few days before buying it. After three straight days of gains and a rally to just above the prior high, a “cup” has formed as part of the bullish “cup and handle” pattern. Three to five days of sideways consolidation from here would form the “handle” portion of the pattern as well. From that level, any breakout above the high of the “handle” would be buyable. The daily chart of SMH below illustrates the strong reversal off the 50-day moving average support level:

Both the S&P and Nasdaq are toying with pivotal levels in which they will either “make it or break it” in the short-term. Both indices are sitting at fresh four-year closing highs, but only marginally. Neither index has rallied hard enough to declare a confirmed breakout to a new high. This, of course, could easily happen within the next day or two, but resistance of the prior highs could just as easily scare traders into selling into strength at current levels. While there are more sectors with bullish chart patterns than bearish ones, astute traders will be prepared to reverse direction at a moment’s notice. Above all, remember to trade what you see, not what you think!

Today’s Watchlist:

BBH – Biotech HOLDR
Long

Trigger = above 206.45 (above the Dec. 4 high)
Target = new highs (will trail a stop)
Stop = 200.70 (below 20 and 50-day MA support)
Shares = 100

Notes = This setup did not trigger yesterday, but we still like it for long entry if it triggers. As discussed in the Dec. 4 issue of The 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):

unrealized P/L = + $660

Closed positions (since last report):

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

$35,835

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