The Wagner Daily | March 3, 2006

Commentary:

After beginning the day with an opening gap down, the major indices chopped around in negative territory before finishing the day modestly lower. The S&P 500 and Nasdaq Composite, down 0.6% at their intraday lows, both closed 0.2% lower. The Dow Jones Industrials and small-cap Russell 2000 indices each lost 0.3%, while the S&P 400 Midcap Index fell 0.4%. Most of the indices closed just above the middle of their intraday ranges, pointing to indecision that followed the previous day’s gains.

The broad market divergence we spoke of in the March 2 issue of The Wagner Daily again showed itself in yesterday’s volume patterns. Total volume in the NYSE was 10% higher than the previous day’s level, but volume in the Nasdaq declined by 7%. This means that the S&P registered another bearish “distribution day,” its second one this week, but the Nasdaq retraced on lighter volume. Over the last three days, the S&P has had two “distribution days” (closed lower and on higher volume) and one lighter volume up day. Compare that bearish action with the Nasdaq, which has had one “distribution day,” one “accumulation day” (closed higher and on higher volume), and one lighter volume day of losses. Although the chart patterns of the S&P and Nasdaq may look similar, a closer look “under the hood” reveals that institutional money has been flowing out of the S&P and Dow and into the Nasdaq.

Because the broad market has been in a trading range for the past several weeks, we have been focusing most of our daily technical analysis on specific industry sectors instead of the major indices. However, the broad market’s indecision of the past several days has changed the technical patterns of a few sectors we recently discussed. As such, we feel it would be beneficial to take a brief, updated look at a few of the sectors we have discussed in recent issues.

In no particular order, recently discussed sector ETFs with bullish chart patterns were: IGW (Semiconductors), RTH (Retail), IYH (Pharmaceuticals), IBB (Biotech), GLD (Gold Trust), and FXI (China). Of these, we feel that IGW, IBB, FXI, and GLD each continue to act well and are showing relative strength to the markets. IGW, which woke up on March 1, remains poised to break out of a bullish eight-week consolidation. IBB and FXI are both holding near their highs as well, but are riskier entries at current prices. Consider trailing stops higher if already long either of those two ETFs. GLD, which perfectly bounced off support of both its 50-day MA and primary uptrend line in mid-February, closed yesterday only 24 cents below its all-time high:

As the chart above illustrates, a close above 56.98 would represent a new record high in GLD. We expect a test of this prior high over the next several days. It should be noted, however, that the individual gold mining stocks that comprise the $GOX index have been lagging behind and showing relative weakness to GLD and the spot gold commodity itself. Since our original analysis, only RTH and IYH appear to have failed their recent breakout attempts.

On the downside, the only sector ETF we have discussed at length is OIH (Oil Service). Although we netted more than a 10 point gain by shorting OIH in the first half of February, it has since rallied above its daily downtrend line. It also closed yesterday above its 20 and 50-day moving averages, as well as its prior high from February 21. Because of this, we expect OIH to rally a bit higher in the short-term. However, a rally into its 50% or 61.8% Fibonacci retracement should provide a low-risk re-entry point to sell short OIH. The daily chart below illustrates those levels at which we will consider re-shorting OIH. Note that we have removed the moving averages so that you can more easily see the Fibonacci retracement lines:

Much of our recent discussion has focused on shorting the broad-based ETFs such as SPY and MDY. However, the action over the past several days has been erratic because the divergence between the S&P and Nasdaq is growing stronger. Therefore, entering new long OR short positions in the broad-based ETFs right now is probably not advisable. We remain short SPY, which we entered on February 28, but have a tight stop just over the February 27 high. Unfortunately, mixed signals caused by divergence within the major indices often causes wild and unpredictable price action across the board. As such, we don’t plan to enter any new broad-based ETF positions until the indices get back in sync with each other in one direction or the other.

Today’s Watchlist:

There are no new setups for today, as we are near our maximum buying power of the model account. As always, we will send an intraday e-mail alert if/when we change our plans during market hours.

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 = ($192)

Closed positions (since last report):

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

$77,628

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