The Wagner Daily | February 13, 2006

Commentary:

The major indices reversed early losses to close slightly higher last Friday, but lower overall volume failed to confirm the rebound. The Nasdaq Composite, S&P 500, and Dow Jones Industrial Average each finished 0.3% higher, but small and mid-cap stocks maintained their new trend of showing relative weakness. The Russell 2000 Index closed 0.1% lower, although it recovered from a morning loss of 1.3%. The mid-cap S&P 400 was unchanged on the day. As it neared our profit target just below the 50-day moving average, we covered our short position in OIH (Oil Service HOLDR) last Friday. That “head and shoulders” chart pattern we shorted netted us a speedy 10-point gain in five days. We do, however, remain short both MDY and XLU.

On the surface, Friday’s intraday action and modest gains might have looked promising for the bulls. However, a closer look at what was happening beneath the surface would reveal a less positive scenario. The biggest negative is that total volume in the NYSE declined by 6%, while volume in the Nasdaq was 12% lower than the previous day’s level. This tells us that the reversal attempt was primarily driven by retail investors as opposed to institutions and professional traders. Had volume surged higher alongside the gains, it would have indicated strong demand by mutual and hedge funds, but the obvious footprint of higher turnover was lacking. Worse is that the lower volume gains followed the prior session’s “distribution day.” Lackluster market internals also failed to confirm Friday’s reversal attempt. Despite 0.3% gains in both the S&P 500 and Dow Jones, declining volume nominally exceeded advancing volume in the NYSE. In the Nasdaq, advancing volume was only slightly higher.

Throughout last week, we mentioned on numerous occasions that Semiconductors were the only industry sector showing any significant strength. While buying some semiconductor stocks or one of the Semiconductor ETFs (IGW, SMH, and PSI) is relatively low risk, it doesn’t make sense to buy the only strong sector while the entire broad market is showing weakness. This is because even sectors with relative strength will eventually fall apart if the contrary broad market trend gathers enough momentum. However, remember that many of the international ETFs trade independently of the U.S. markets, especially those in emerging markets. One such ETF that may be coming into a buy zone in the coming week is FXI, the iShares ETF that tracks the Xinhua China 25 Index (mainland China’s equivalent of the Dow Jones). We netted a large profit trading this ETF when it first broke out in the middle of last year, and bought a similar ETF (PGJ) when FXI broke out again in January of this year. Since then, we have been waiting for a price correction that will provide us with a low-risk re-entry point on the long side. On the weekly chart below, notice how FXI surged higher after breaking its weekly downtrend line in the first week of January:

Drilling down to the shorter-term daily chart, you will see that FXI has been correcting for the past two weeks, holding support at its 20-day moving average:

In terms of the proper buy point, we like FXI long if it rallies above its short-term downtrend line from the January 30 high (the pink dotted line on the chart above). Regular subscribers should note our trigger, stop, and target prices below.

As mentioned in the February 10 issue of The Wagner Daily, the key resistance levels to watch in the major indices is the February 9 highs. Unless those highs are violated, we remain bearish and positioned on the short side in the near-term. For the broad-based ETFs, those resistance levels are: SPY – 127.60, QQQQ – 41.37, DIA – 109.56, MDY 141.57, IWM – 72.34. You may want to set alerts on your trading platform to notify you if any of these ETFs violate those highs. If so, it could indicate a temporary break in the recent market weakness. The first ETF to rally above that high would also tell you which stocks are showing the most relative strength. But unless the market begins to see new sector leadership and retention of gains in the leading stocks, it seems unlikely the market will rally in a meaningful way. Overhead resistance of the 20 and 50-day moving averages doesn’t help the bulls either.

Today’s Watchlist:

FXI – iShares Xinhua China 25 Fund
Long

Trigger = above 71.15 (break of hourly downtrend line)
Target = new high (will trail stop)
Stop = 68.45 (below Feb. 3 low)
Shares = 300

Notes = See commentary above for explanation of the setup.

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 142.15

unrealized P/L = + $536

XLU short (700 shares from Feb. 2 entry) –
shorted 32.03, stop 32.39, target 30.15, unrealized points = + 0.25, unrealized P/L = + $175

Closed positions (since last report):

net P/L = + $1,043

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

$78,170

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