The Wagner Daily | February 14, 2006

Commentary:

Weakness in the technology-related sectors caused the broad market to sustain another round of losses yesterday, but much lighter turnover helped temper the effect. The Nasdaq Composite fell 1.0%, the small-cap Russell 2000 lost 0.9%, and the mid-cap S&P 400 dropped 0.8%. However, relative strength in the Retail and Pharmaceutical sectors helped to prop up the S&P 500, which closed only 0.3% lower. The Dow Jones Industrial Average, which has been holding up well throughout this month’s broad-based weakness, lost only 0.2%. The S&P 500 finished near the middle of its intraday range, indicating a bit of indecision into the close, but the other indices closed in the lower third of their ranges yesterday.

For the bulls, the one positive about yesterday’s session is that total volume declined significantly in both exchanges. Volume declined by 21% in the NYSE, while turnover in the Nasdaq was 18% lighter than the previous day’s level. Yesterday’s volume levels were well below their 50-day averages in both exchange, and it was also the lightest volume day of 2006. This tells us that institutions and professional traders really stood on the sidelines yesterday, perhaps in cautious anticipation of new Fed chief Bernanke’s Capitol Hill testimony on Wednesday.

One of the few sector ETFs that may be setting up for long entry is GLD (Gold Trust). As it has been steadily trending higher, we have profitably traded this ETF on several occasions over the past six months. We did not participate in the most recent move last month, but GLD has since corrected down to support of its daily uptrend line and 50-day moving average. Looking at the chart below, notice how the uptrend line from the November low loosely converges with support of the 50-day MA:

Needless to say, the correction down to its trendline and 50-MA should soon provide us with a low-risk entry point on the long side. Even better is the fact that the gold commodity’s performance is not directly tied to the stock market’s direction. Be aware, however, that buying a stock or ETF on the first touch of its 50-MA without first having confirmation of the uptrend’s resumption is a bit risky. Instead, we recommend waiting to make sure buyers will step in at the 50-MA, then subsequently buying the first break of the hourly downtrend line that is now forming from the February 3 high. Having patience to play it this way prevents you from getting shaken out, as trend continuations near 50-day moving averages are often quite volatile. We have already begun to stalk GLD for the proper re-entry point and will promptly inform regular subscribers when we feel the time is right to buy. In the meantime, you may want to add GLD to your watchlist, as well as the individual gold mining stocks.

Regardless of the reason for such light broad market volume yesterday, we must be cautious when turnover falls to such light levels because the market can easily make a fast and furious move in either direction when institutional activity returns. Based on the recent string of numerous “distribution days,” one could conclude that institutions will continue to sell into strength in the short-term. However, a healthy dose of caution is warranted on both sides of the market right now, as the major indices are hanging near pivotal support/resistance levels. The S&P 500, for example, has been stuck in a choppy, sideways range for the past five days. Preventing the index from rallying is overhead resistance of the 20 and 50-day moving averages, while horizontal price support from prior lows has been enabling the index to hold up:

The Nasdaq Composite has a similar chart pattern as the S&P, although it has been a bit weaker. The index closed at its lowest price of the calendar year yesterday, although it is trying to clinging to the January 23 intraday low. If the Nasdaq breaks yesterday’s low, it will likely drop all the way down to test its January 3 low. This is illustrated on the chart below:

Consider taking it easy with new trade entries over the next several days. Yesterday’s large drop in turnover indicates institutions are taking a “wait and see” stance, and astute traders will do the same. Instead, focus on managing existing positions with tightened trailing stops.

Today’s Watchlist:

FXI – iShares Xinhua China 25 Fund
Long

Trigger = above 70.55 (break above hourly downtrend line)
Target = new high (will trail stop)
Stop = 68.45 (below Feb. 3 low)
Shares = 300

Notes = This setup from yesterday did not trigger yet, but we still like the setup for potential entry today. See commentary in the February 13 newsletter for an 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 141.80

unrealized P/L = + $872

XLU short (700 shares from Feb. 2 entry) –
shorted 32.03, stop 32.39, target 30.15, unrealized points = + 0.29, unrealized P/L = + $203

Closed positions (since last report):

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

$77,806

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