The Wagner Daily | February 23, 2006

Commentary:

Stocks followed-up two days of lower volume losses with a solid session of broad-based gains on expanding volume yesterday. The Nasdaq Composite rebounded 0.9%, wiping out the previous day’s loss and enabling the index to close where it began the week. Both the small-cap Russell 2000 and mid-cap S&P 400 indices also advanced 0.9%, while the S&P 500 similarly gained 0.8%. Contrary to recent action, the Dow Jones Industrials lagged a bit, but its 0.6% gain was still enough for the blue chip index to close at a new high. As anticipated, new support of its prior downtrend line helped the S&P to bounce yesterday, while the Dow’s support of its prior high did the same for that index.

Total volume was 5% higher than the previous day’s level in both exchanges, causing both the S&P and Nasdaq to register a bullish “accumulation day.” However, despite the rise in turnover, volume in both the NYSE and Nasdaq still came in below the respective 50-day average levels. While it was certainly positive that higher volume confirmed yesterday’s gains, the modest expansion in turnover indicates many institutional players still remained on the sidelines. In the Nasdaq, for example, volume has come in above its 50-day average level in only two of the past seven sessions. Yesterday was not one of them Although it is only February, recent volume levels have been more typical of the annual summer doldrums.

Market internals were positive yesterday, though not by an overly wide margin. In the Nasdaq, advancing volume exceeded declining volume by only 3 to 2. The NYSE ratio was positive by just less than 2 to 1. Generally speaking, we like to see advancing volume exceed expanding volume by at least 2 to 1 in order to confirm an “up” day. In fact, it’s not uncommon for the ratio to be positive by more than 4 to 1 on strong “accumulation days.” This ratio is important because it tells us how much volume is behind the stocks that were gaining or declining. We feel it gives a more accurate view of what is happening “beneath the surface” than merely following the number of issues advancing or declining (standard market breadth).

Among yesterday’s top sectors, the PowerShares Halter China Index ($HXC) rallied 1.7% and closed at a new all-time high. Our long position in FXI (iShares Xinhua China 25 Fund) surged 2.1% to a new high as well. The Biotech Index ($BTK), which we pointed out to subscribers on February 17, also showed a lot of relative strength and gained 1.9% yesterday. The index again closed at a new 5-year high.

We once again saw an inverse relationship between transportation and oil-related stocks yesterday. The DJ Transportation Average gained 1.2% and finished at a fresh record high, but the Oil Service Index ($OSX) fell 2.3%. The $OSX also closed back below its 50-day moving average after recovering above it for only one day. Since the start of the month, the $OSX has been in a steady downtrend and resistance of that downtrend line is what stopped the February 21 advance. OIH (Oil Service HOLDR) closed yesterday near the price we covered that short position for a 10-point gain back on February 10. However, you may consider re-shorting OIH in anticipation of the downtrend’s resumption. If shorting OIH near its current level, a stop at least one point over the February 21 high is ideal. The daily chart of OIH below illustrates resistance of its current downtrend line:

On the flip side, we like how the Semiconductor Index ($SOX) bounced off support of its 50-day moving average yesterday. As we mentioned last week, the daily chart of the $SOX is choppy, but the uptrend line from the low of October 2005 remains intact. The chart below illustrates yesterday’s bounce off the 50-day MA, as well as support of the primary uptrend line:

We feel the Semiconductor Index now provides low-risk entry points on the long side, BUT the one big concern is that the Nasdaq remains below its primary downtrend line. Nevertheless, buying one of the Semiconductor ETFs at current levels presents a positive risk/reward ratio because you can simply place your stop below yesterday’s low. The downside risk would therefore be minimal, while the potential profit is large, particularly if the primary uptrend resumes. Of the three main semiconductor ETFs (SMH, IGW, and PSI), we would recommend avoiding SMH due to its relative weakness that is caused by too heavy a concentration in Intel. Both IGW and PSI, on the other hand, are consolidating nicely. Regular subscribers will see our trigger, stop, and target prices on IGW below.

Today’s Watchlist:

IGW – iShares Semiconductors
Long

Trigger = above 66.55 (above 20-day MA and Feb. 21 high)
Target = new high (will trail stop)
Stop = 64.70 (below 50-day MA)
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 72.20

unrealized P/L = + $528

MDY short (300 shares from Feb. 21 entry) –
shorted 140.87, stop 142.82, target 133.70, unrealized points = (1.45), unrealized P/L = ($435)

Closed positions (since last report):

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

$72,484

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