The Wagner Daily | January 11, 2006

Commentary:

Stocks began the day in marginally negative territory, oscillated in a narrow, sideways range throughout the session, then recovered to finish flat to higher. Both the S&P 500 and Dow Jones Industrials were unchanged, while the Nasdaq Composite gained less than 0.1%. The small-cap Russell 2000 and mid-cap S&P 400 indices continued their perfect records in 2006, gaining 0.7% and 0.3% respectively. Both the Russell and S&P 400 are trading at all-time highs, so the complete lack of overhead supply means only minimal buying pressure is needed in order to lift those indices higher. The relative strength of the Russell and S&P 400 over the past several days is a good example of how stocks, ETFs, and indexes at new highs typically continue to cruise higher.

Total volume in the NYSE increased by 5% yesterday, while volume in the Nasdaq was on par with the previous day’s level. Given that the S&P was unchanged, a decline in volume would have been more bullish. When turnover rises and prices do not correspondingly gain, it often indicates “churning” activity that is indicative of institutions selling into strength. However, volume only rose by a small amount in the NYSE and was unchanged in the Nasdaq. Overall, one could infer that yesterday’s relationship between price and volume leaned to the bearish side, but not enough to rouse any major red flags. On the contrary, a minor price correction would be welcome.

As we approach the middle of January, the broad market to continues to act great. Both the Russell and S&P 400 are at record highs, while the S&P 500, Dow Jones, and Nasdaq Composite are at four-year highs. With a lack of overhead supply, it is pointless to discuss where the major resistance levels are. Quite simply, there aren’t any! Instead, let’s look at where one could expect the major indices to find short-term price support in the event of a correction. First, take a look at the S&P 500 daily chart:

As the chart above illustrates, the S&P has key support between the range of 1,267 (the 20-day moving average) and 1,275 (prior high from December). Below that, the 50-day moving average (the orange line) should provide major support at the 1,251 area. If looking for a low-risk entry point in SPY or other new long positions in the broad market, a price retracement into the range of 1,267 to 1,275 would be ideal. Alternatively, a sideways “correction by time” of three to five days would also enable the 20-day moving average to rise up and provide support as well. Of the two, a “correction by time” would be more bullish because it would indicate sellers are few and far between, even when the bulls are taking a break. Next, let’s analyze the Nasdaq Composite’s short-term support levels:

Similar to the S&P 500, the Nasdaq should first find support in the area of its prior highs from December (2,271 to 2,278). Below that, the 20-day MA, presently at 2,254, will provide secondary price support. The 50-day MA rests further down at 2,227. Again, any retracement into those support levels would provide ideal entry points for Nasdaq-related stocks or ETFs. Specifically, consider buying SMH (Semiconductor HOLDR) or individual semiconductor stocks if the Nasdaq corrects in an orderly fashion down to the range of 2,254 to 2,278.

The Dow Jones Industrial Average is less extended than the S&P and Nasdaq, as it just broke out to a new four-year high three days ago. The intraday lows of the past two days correlate to support of the prior highs in the Dow, which is why we bought a new long position in DIA (Dow Jones Tracking Stock) on January 9:

Obviously, there are several industry sectors we are stalking for potential entry on a price correction as well. Here are the sector ETFs we like the most for long entry on any retracement down to support: GLD (Gold Trust), FXI (China Xinhua 25), SMH (Semiconductors), and SWH (Software). We also like HHH (Internet) if it breaks out of consolidation on its weekly chart. We presently remain long PPH (Pharmaceuticals) and DIA (Dow Jones Industrials), both of which are acting well. As always, regular subscribers will be alerted of any changes to stops in these positions, as well as new entries in any of the ETFs above.

Today’s Watchlist:

There are no new trade setups for today, as we need to see at least a minor broad market correction before entering new ETFs. Advanced traders should reference the above for specific ETFs we like right now.

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 = + $960

DIA long (300 shares from Jan. 9 entry) –
bought 109.89, stop 108.58, target 113.10, unrealized points = + 0.19, unrealized P/L = + $57

Closed positions (since last report):

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

$69,159

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