The Wagner Daily | February 22, 2006

Commentary:

After selling off during the first hour of trading, the broad market traded in a lethargic, sideways fashion before finishing the day with losses on lighter volume. Like the previous day, the Nasdaq Composite sustained the worst loss by closing 0.9% lower. The S&P 500 and mid-cap S&P 400 indices both shed 0.3%, while the Dow Jones Industrials lost 0.4%. The small-cap Russell 2000 fell 0.6%. Each of the major indices closed in the bottom third of their intraday ranges.

Total volume in the NYSE declined by 1%, while volume in the Nasdaq was 8% lighter than the previous day’s level. Although stocks have closed lower for the past two sessions, the positive is that total volume levels declined on both days. This tells us that the losses resulted mostly from retail selling as opposed to heavy institutional distribution. If mutual and hedge funds were behind the selling, a telltale rise in turnover would have accompanied the losses. But consider the other side of the equation as well. Even though the NYSE has not dropped on higher volume since February 7, aggressive institutional buying has been absent as well. Of the seven “up” days the S&P 500 has had this month, only two of those days’ gains occurred on higher volume. Overall, it seems that institutions have been taking a ride in the back seat, trying to get a feel for the broad market’s next clear direction before firmly taking a stance on either side. It would not be a bad idea for you to consider doing the same.

In yesterday’s Wagner Daily, we discussed a potential long entry in FXI, the iShares ETF that mirrors the Xinhua China 25 Index. Specifically, we liked that it had been consolidating in a narrow range for the past four days after bouncing off support of its 20-day moving average the prior week. As you may recall, our plan was to buy the first rally above the high of its four-day range. But because the U.S. market hours follow the Chinese market hours, FXI often gaps open well above or below the previous day’s close, depending on the earlier performance of the Xinhua index. This was the case yesterday, as FXI opened not only above its four-day range, but at a fresh record high as well:

Unfortunately, a large opening gap in a stock or ETF often negatively skews the risk/reward ratio of the trade setup, which sometimes causes us to cancel the planned entry in a new position. Such was the case on February 14, as FXI’s opening gap above the prior day’s close prompted us to cancel the planned long entry that day. However, yesterday’s situation was different because FXI gapped and opened at a new all-time high. Unlike the February 14 gap that put FXI right below resistance of its prior high, yesterday’s gap to a new high took care of all the investors who were hoping to sell and “just break even” on their position. As such, the odds of FXI going higher are now greater than they were on February 14 simply because there is no more overhead supply. This is also the reason why most stocks and ETFs trading at new 52-week highs will usually continue much higher before correcting. As for yesterday’s entry in FXI, we managed the gap in the usual manner by only buying the first rally above the 20-minute opening high. See the MTG Opening Gap Rules to learn more about how we manage gaps.

Taking an updated look at the broad market, you will notice that the S&P 500’s losses over the past two days have caused the index to drift down to support of its prior downtrend line. As we often discuss, the most basic tenet in technical analysis states that a prior resistance level will usually become the new support level after the resistance is broken. Therefore, keep a close eye on how well the S&P holds up at its current level. It should find support at yesterday’s low, but be ready to hit the sell button if it does not. The daily chart of the S&P below illustrates new support of the prior downtrend line:

Similarly, the Dow Jones has come down to support of its prior high from last month. This should act as support for the Dow, which is trading only a few points below nearly a 5-year high:

As for the Nasdaq, it has fallen further below its primary downtrend line that it failed to rally above last week. Clearly, weakness in the tech-heavy Nasdaq is making it difficult for the S&P and Dow to rally. As long as the major indices remain out of sync with each other, we expect choppy and trendless trading conditions to be the norm. Caution is in order on both sides of the market. Cash is even better.

Today’s Watchlist:

There are no new setups for today, although we continue to stalk GLD (iShares Gold Trust) for a potential long entry.

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 71.25

unrealized P/L = ($92)

MDY short (300 shares from Feb. 21 entry) –
shorted 140.87, stop 142.70, target 133.70, unrealized points = (0.63), unrealized P/L = ($189)

Closed positions (since last report):

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

$71,618

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