The Wagner Daily | January 9, 2006

Commentary:

Stocks overcame weakness during the initial hour of trading, as the major indices rallied steadily throughout Friday’s session and capped an already strong week with another day of gains. Continued strength in the Semiconductor Index ($SOX) helped enable the Nasdaq to post a 1.3% gain. The $SOX surged 8.3% higher last week, gaining in each of the four days, and closed at its highest level since February 18, 2004. SMH (Semiconductor HOLDR) followed-through to a new high as well. The S&P 500 and Dow Jones Industrials also turned in decent gains of 0.9% and 0.7% respectively on Friday. The mid-cap S&P 400 rallied 1.1%, while the small-cap Russell 2000 gained 1.2%. Both indices also finished at new record highs! In the holiday-shortened four-day week, the Nasdaq cruised 4.5% higher and the S&P 500 gained 3%.

Not only did the Nasdaq zoom higher last Friday, but it did so on higher turnover. Total volume in the Nasdaq was 20% higher than the previous day’s level, enabling the index to register another bullish “accumulation day.” Volume in the NYSE, however, was 2% lighter. Regardless, both the S&P and Nasdaq locked in gains on greater than average volume on each and every day last week. Despite any preconceived expectations you may have had coming into the new year, it is undeniable that institutional buying interest was alive and well in the first week of 2006.

In the January 6 issue of The Wagner Daily, we mentioned that both the S&P and Nasdaq were poised to either “make it or break it.” Unless conditions suddenly change, it appears they are going to “make it” because last week’s impressive broad-based gains enabled each of the five major indices we follow to absorb all overhead supply and close at new multi-year highs. Even the Dow, a laggard index in recent years, closed the week at its highest level since June of 2001. The weekly chart of the Dow is very interesting, as the index is poised to break out of a narrow, seven-week base of consolidation at its high. We like the idea of buying DIA (Dow Jones Tracking Stock) on any breakout above last week’s high because it is less extended than the other indices. It has also begun to show relative strength, which should attract more institutional buying interest. Regular subscribers should note our detailed entry, stop, and target prices for DIA today, but the weekly chart below illustrates the general setup:

Although we are not presently long any of the broad-based ETFs, we are focusing on specific industry sectors instead. We remain long PPH (Pharmaceutical HOLDR) from our January 3 entry and the position is presently showing a marked-to-market gain of nearly 2 points. We were stalking BBH (Biotech HOLDR) for a potential long entry last week, but the ETF is now showing relative weakness to the Biotech Index ($BTK). As such, we have removed BBH from today’s watchlist. GLD (Gold Trust), which we have profitably traded several times throughout the past two months, again posted a new all-time high last Friday. SMH (Semiconductor HOLDR) acted great last week, but it needs to correct a bit in order to provide an ideal entry point. When stocks or ETFs break out, the first pullback to the breakout point typically provides a low-risk entry point on the long side. Again, a sideways consolidation of a few days would also enable the intraday moving averages to rise up and provide support for new long entry. FXI (China Xinhua 25), which we analyzed extensively in the January 5 Wagner Daily, busted out to a new record high last Friday as well.

As long-time readers of this newsletter already know, indices and ETFs that are trading at new 52-week highs (or longer) typically continue to trend higher for an extended period of time, due simply to the lack of overhead resistance. Without the overhead supply that comes from prior horizontal resistance levels, it does not take much buy-side volume to maintain the momentum of a rally. Remember that the market only needs to have more buyers than sellers in order to move higher — it’s as simple as that!

With most indices trading at four-year highs and several at all-time highs, you don’t need us to tell you that your odds of success favor the long side of the market. Trying to initiate profitable short positions when everything is sitting at new highs is utterly foolish. This, of course, is not to say that the market will not correct in the short-term, but the risk-reward ratio of selling short right now is very bad. For example, you may be able to net a one point gain on the short side if your timing is right, but you are risking the possibility of a much larger loss if upside momentum continues. It is an overused cliche, but the trend really is your friend! If you’re currently long, simply trail your stops higher to maximize gains and protect profits. But if you are flat, consider waiting for at least a one or two day retracement before buying new positions. Even strong markets correct along the way, but waiting for that correction so that you can go long is much smarter than trying to short the first sign of weakness.

Today’s Watchlist:

DIA – Dow Jones Industrial Average Tracking Stock
Long

Trigger = above 109.88 (above the Jan. 6 high)
Target = 113.10 (just below May 2001 high)
Stop = 108.58 (below the Jan. 6 low)
Shares = 300

Notes = Per the commentary above, a breakout to new highs in DIA should generate upside momentum for further gains.

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 = + $920

Closed positions (since last report):

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

$36,095

Notes:

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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