The Wagner Daily | April 5, 2006

Commentary:

As we have become accustomed to over the past several weeks, the broad market failed to follow-through on the previous afternoon’s bearish reversal. Instead, the S&P 500 recovered most of Monday’s intraday loss, while the Nasdaq Composite closed near the middle of that day’s range. This translated to a 0.6% gain in the S&P 500, 0.5% gain in the Dow Jones Industrial Average, and a 0.4% advance in the Nasdaq Composite. The small-cap Russell 2000 rallied 0.4% and the S&P Midcap 400 finished 0.3% higher. The moderate gain in the Nasdaq was enough to enable the index to close at a new five-year high, but the S&P remained in its choppy, sloppy three-week range.

Turnover was mixed yesterday, preventing the broad market from realizing bullish “accumulation days.” Total volume in the Nasdaq edged up 3%, but volume in the NYSE was 11% lighter than the previous day’s level. Despite its gain, market internals in the Nasdaq were negative and did not confirm yesterday’s rally. Just like the previous day, declining volume in the Nasdaq exceeded advancing volume by a margin of approximately 3 to 2. The NYSE internals, however, were positive by the same margin. Not surprisingly, turnover in the NYSE was once again below its 50-day average level. In recent weeks, the broad market’s volume levels have been quite representative of lethargic summer activity, even though it is not. Unfortunately, choppy and directionless trading is typically the end result of light turnover, and we certainly have had no shortage of that!

One sector that has just broken out above resistance is the Internet Index ($GIN). After a 14% correction off its January 2006 high, the $GIN came into support of its 200-day moving average last month. On March 29, the index broke out above its two-week trading range and began to show signs of life. It then consolidated near the high of the range for three days before rallying above its 50-day moving average and primary downtrend line. Being that yesterday was the first time the $GIN closed above its 50-day MA since January 27, it appears a reversal of its multi-month downtrend may be shaping up:

Because of the recent relative strength in the Internet Index, we view any minor retracements in the sector as buying opportunities. At present, there is only one major ETF, the Internet HOLDR (HHH), that specifically tracks the Internet sector. Other ETF families have Internet stocks mixed in with Software or Networking stocks. Unfortunately, HHH does not closely follow the $GIN index because it lacks the inclusion of Google. Just as SMH has been lagging the $SOX index, HHH has been lagging the $GIN index. As such, you are probably better off building your own “synthetic ETF” by simultaneously trading a small basket of the leading Internet stocks as opposed to trading HHH.

If the market has been preventing you from staying with your positions for more than a day in recent weeks, a brief look at the S&P’s intraday action over the past several weeks will help you understand why this has been the case. Check out the incredibly indecisive nature of the S&P 500 on the hourly chart below:

Highlighted above, you will see there have been no less than four bearish reversal days since March 21 that have simply led to “reversals of the reversal days” in each of the following sessions. It’s no wonder that many short-term swing traders, including yours truly, have had difficulty remaining in both long and short positions for more than a day before getting whipsawed out. When the market enters into a spastic phase like this, it is costly to try to anticipate when the erratic chop will end — doing so will only result in getting stopped out excessively. Instead, your best bet is to reduce both your average position size and the quantity of open positions. It’s also a good idea to be positioned on both sides of the market until the market proves it can break out of the range.

To conclude on a different note, we wish to bring your attention to an article that appeared in today’s issue of Investors Business Daily (IBD). After presenting at the World Series of ETFs last Friday, I was approached by an IBD reporter and briefly interviewed on my thoughts regarding the StreetTRACKS Gold Trust (GLD). A portion of that interview appeared in the ETF section of today’s IBD. In case you are not a subscriber, you may click here to view the article online.

Today’s Watchlist:

Due to continued indecision and choppy behavior of the broad market, there are no pre-market ETF trade setups for today. However, we remain short BBH and will inform subscribers via intraday alert of any other new intraday trade entries.

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 = + $150

Closed positions (since last report):

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

$57,603

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