The Wagner Daily | March 7, 2006

Commentary:

Stocks spent the first half of yesterday consolidating in a tight and narrow range near the previous day’s lows, but a sharp mid-day selloff resulted in losses across the board. The bearish “inverted hammer” candlestick patterns that formed on daily charts of the major indices last Friday followed through to the downside. Small and mid-cap stocks showed the most relative weakness, as both the Russell 2000 and S&P 400 indices fell 1.0%. The Nasdaq Composite and S&P 500 each lost 0.7%, while the Dow Jones Industrial Average dropped 0.6%. Each of the major indices closed around the bottom 20% of their intraday ranges and near support of their 20-day moving averages.

Turnover levels were mixed yesterday, as total volume in the NYSE increased by 7%, but volume in the Nasdaq was 10% lighter than the previous day’s level. The losses on higher volume made yesterday the third “distribution day” in the S&P within the past five sessions. Volume also came in above 50-day average levels in each of those three days, confirming the institutional selling. Because the Nasdaq has had one “accumulation day” and only two “distribution days” within the same period, it seems the underlying internals in the Nasdaq are a bit more positive. While a healthy market can typically absorb one or two bouts of institutional selling within a several week period, the presence of three or more “distribution days” serves as a warning to astute traders.

Two sector ETFs we recently discussed as continuing to show relative strength are now in danger of breaking support: GLD (streetTRACKS Gold Trust) and IGW (iShares Semiconductor). Although both continued to act well throughout last week, yesterday’s action in both ETFs was not good. GLD, which bounced off support of its 50-day MA on February 16, fell back below support of its 20-day MA and closed just above its 50-day MA. More importantly, it has formed a “lower high” and is now in danger of breaking its four-month uptrend line that has been in place since the November 4 low. If you are long GLD, consider keeping a tight stop just below yesterday’s low in order to protect against a break of the uptrend line and 50-day MA:

IGW was recently acting well, as the ETF bounced perfectly off support of its 50-day MA on March 1 and consolidated near its 52-week high in the latter half of last week. However, recent bad news out of sector giant Intel seems to have spooked investors and traders away from the Semiconductor Index. Yesterday’s 0.9% slide caused IGW to give back more than two-thirds of its gain since the February 28 low. Like many other sectors and the broad-based ETFs as well, it closed back below its 20-day MA and just above its 50-day MA. If long IGW, we again recommend tightening your stop to just below the 50-day MA:

As expected, OIH (Oil Service HOLDR) has begun to resume its five-week downtrend after failing to overcome resistance of its 50-day MA last week. OIH plummeted more than 4% yesterday and will likely test support of its February low in the coming days. If short, consider covering and locking in profit on that imminent test of support, at least on partial share size.

Based on yesterday’s action, it appears that an end to the broad market’s recent volatility contraction may be just around the corner. In yesterday’s Wagner Daily, we looked at the key support levels of the three most popular broad-based ETFs: SPY, QQQQ, and DIA. Both SPY and QQQQ closed only pennies above support of their February 28 lows, while DIA closed just below it. Looking at the daily chart of SPY, notice how it closed only four cents above its February 28 low of 128.13, which it probed below on an intraday basis. Also notice how the 20-day moving average has converged at that same support level as well:

Going into today, traders will certainly be focused on yesterday’s low in the S&P 500 because a break below that level would cause the index to close below three key support levels: the February 28 low, the 20-day MA, and the 50-day MA. We remain short SPY from our original entry at 129.04 and are presently showing a decent profit, but we will be on alert for signs of a possible reversal off convergence of these pivotal support levels. A rally back above yesterday’s high would be cause for concern on the bearish side.

QQQQ also closed yesterday just above its February 28 low and right at support of its 20-day moving average. The one difference, however, is that QQQQ remains below its 50-day MA while SPY is still above it. This creates additional selling pressure in the Nasdaq 100, although the more diversified Nasdaq Composite is still above its 50-day MA. As the chart below illustrates, a selloff down to the 200-day moving average in QQQQ seems likely if it closes firmly below yesterday’s low:

Curiously, the index that showed the most relative strength last month, the Dow Jones Industrial Average, has failed to hold February’s breakout to a new multi-year high. DIA (and the Dow Jones) finished yesterday below its February 28 low, its 20-day moving average, and at a three-week low. Support of its 50-day MA is now less than 0.5% below yesterday’s closing price:

With so many indices and industry sectors sitting at closely-watched support levels, now is not the time to be complacent about your positions. Be prepared for a swift move in either direction and consider tightening stops on both long and short positions. Don’t be overly opinionated about which way you anticipate the markets to go from here. Instead, simply listen to the market and it will clearly show you the way to go. Above all, remember to trade what you see, not what you think!

Today’s Watchlist:

There are no new setups for today, as we are near our maximum buying power of the model account. We do, however, expect resolution on the SPY in one direction or the other in the coming days.

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 = + $522

Closed positions (since last report):

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

$76,902

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