The Wagner Daily | March 10, 2006

Commentary:

After a feeble rally attempt in the first thirty minutes of trading, the bears quickly took control yesterday, causing stocks to trend steadily lower throughout the session and finish with broad-based losses. The Nasdaq Composite again showed the most relative weakness and fell 0.8%. The S&P 500, S&P Midcap 400, and small-cap Russell 2000 indices each lost 0.5%, while the Dow Jones Industrials dropped 0.3%. Each of the major indices finished at their intraday lows. Because institutions usually make their moves in the final hour of trading, this tells us there was a complete lack of institutional support into the close. Our short entry in MDY triggered yesterday, as we shorted the rally into new resistance of its 50-day moving average.

Total volume in the NYSE declined by 12% yesterday, while volume in the Nasdaq was 7% lower than the previous day’s level. Although it is positive that the market’s losses occurred on lighter volume, the intraday pattern was much the same as the previous day. Specifically, volume was on pace to be even lighter after the initial morning rally, but turnover increased as the market subsequently trended lower. Market internals similarly made a bearish u-turn as the day progressed. In the morning, advancing volume in the NYSE exceeded declining volume by more than 2 to 1, but the ratio was negative by nearly 2 to 1 at day’s end.

While scanning the extensive list of ETFs we follow on a daily basis, we were hard pressed to find a single ETF that looks like a clear buy setup. Even international ETFs that have been outperforming the U.S. markets have begun to correct sharply. Two such examples are FXI (iShares Xinhua China 25 Fund) and EWZ (iShares Brazil). Taking a look at EWZ, one of the best performing ETFs this year, notice how it closed yesterday below its 50-day moving average for the first time since last October. However, the one difference between this time and last October’s correction is that the drop of the past week has been on huge volume:

The massive volume in EWZ in recent days tells us it is under institutional distribution. Even though ETFs are pegged to the price of their underlying stocks and move accordingly, we have found that an ETF’s volume pattern usually matches the volume patterns of the underlying stocks as well.

In addition to weakness in the international ETFs, many industry sectors have failed their recent breakouts as well. One such example is IGN, the iShares ETF that mirrors the Goldman Sachs Networking Index. After consolidating at its high and in a tight range for eight weeks, IGN eventually broke out to a new 52-week high on March 1. Because the consolidation was so long, the breakout should have been powerful and sustainable, but now it has fallen back into its range only six days later:

Going into yesterday, the broad market was positioned to follow-through on the previous day’s bullish reversal attempt, but buyers were nowhere to be found. As a result, the S&P 500 gave back nearly all of the previous afternoon’s gains and fell back below its 50-day moving average. The Nasdaq was unable to rally back above its 50-day MA in the morning, and subsequently fell all the way down to its low of the previous day. It’s also interesting to note that the Nasdaq now has additional overhead resistance of its prior downtrend line from the January 11 high. When the Nasdaq began to drop on March 3, it should have found support at its prior downtrend line, but it quickly fell back below it. The reason it should have found support is that the most basic tenet of technical analysis states the following: a prior resistance level becomes the new support level after that resistance is broken (and vice versa). We have illustrated the prior downtrend line that failed to hold as support:

In addition to yesterday’s negative action in the major indices, we once again saw a complete lack of sector leadership, as well as the continued breakdown of many former leading stocks. Needless to say, all these factors do not bode well for the short-term direction of the broad markets. With so many industry sectors failing their recent breakouts or falling below support of their primary uptrend lines, trying to swim against the tide by going long does not make sense. As always, be sure to honor your stops because we feel it is risky to be long right now. If you are sitting on a losing position, don’t let a small or moderate loss turn into one that causes major damage to your account. Above all, remember to “trade what you see, not what you think!”

Today’s Watchlist:

IYT – iShares DJ Transportation Avg.
Short

Trigger = below 78.90 or above 79.50 (whichever comes first)
Target = 75.30 (test of February low)
Stop = 80.90 (above the 61.8% Fibo retracement of the recent selloff)
Shares = 300

Notes = The Transportation sector, formerly a market leader, has begun to correct on its daily chart (notice the high volume on March 8). Given the current market environment in which leading sectors are correcting the hardest, we feel the Transports may be next.

Also, be aware that IYT may be on your broker’s “hard to borrow” list. This means your brokerage firm’s web site may initially tell you that shares are not available for shorting. But if this occurs, we recommend you phone your broker and specifically ask them to locate shares of IYT to borrow for short selling. With a little push, your firm should easily be able to call around and get shares for you within a matter of minutes. If not, consider switching to a different firm who offers a wider selection of stocks and ETFs for shorting. Just a little advice for those of you who run into this issue.

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 = + $177

Closed positions (since last report):

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

$41,646

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