The Wagner Daily | April 10, 2006

Commentary:

Stocks wrapped up the first week of the second quarter on a sour note, as a broad-based selloff evaporated the broad market’s gains for the week. Last Friday morning’s opening strength quickly dissipated, causing the major indices to trend lower throughout the entire session. The S&P 500 and Nasdaq Composite, both of which briefly spiked to new five-year highs on the open, fell 1.0% and 0.9% respectively. Both the small-cap Russell 2000 and S&P Midcap 400 indices probed to new all-time highs out of the starting gate, but shed 1.3% and 1.0% by the closing bell. The Dow Jones Industrial Average lost 0.9%. Each of the major indices closed at their intraday lows, which positions the broad market for a negative start to this week.

The sole positive buffer of the weak session was that the losses occurred on lighter volume. Total volume in the NYSE was 4% lighter than the previous day’s level, while turnover in the Nasdaq declined by 8%. This tells us that, although the market’s losses were substantial, institutions were not aggressively behind the selling. Had volume surged in conjunction with the selloff, the session would have borne much more significance. Nevertheless, market internals were firmly negative. In the NYSE, declining volume exceeded advancing volume by a margin of more than 5 to 1. The ratio in the Nasdaq was negative by approximately 7 to 2.

One factor that differentiated Friday’s down day from other selloffs in recent weeks is that weakness was seen in every sector. Of the 24 industry sectors we follow on a daily basis, not a single one of them closed in positive territory. Even oil, metals, mining, and semiconductors, each of which have been showing relative strength lately, all closed in the red. The Biotech sector ($BTK) followed up the previous day’s 2.3% loss with another 0.8% drop, which pushed our remaining short position in the Biotech HOLDR (BBH) to an unrealized gain of 6.5 points. Unfortunately, the iShares Semiconductor (IGW) stalled at its breakout level, but we are maintaining a tight stop to protect against yet another failed breakout in the sector.

After closing above its 1,310 resistance level for only one day, the S&P 500 promptly reversed course and fell back into its choppy and erratic three-week trading range. This, of course, is bad news because the indecision of that trading range has caused a lot of failed breakouts and breakdowns over the past month. But the good news is that, dare I say, we may finally see some resolution and a confirmed break of the range. As we have mentioned before, we don’t care whether the break of the range is up or down, just as long as some sort of tradeable trend develops.

Although each of the S&P’s bearish reversal days in recent weeks failed to follow-through to the downside, one factor may yield a different result this time. That factor is that the S&P 500 closed below its 20-day moving average for the first time since the trading range developed. The index also is sitting just above support of its primary uptrend line, which has converged with support of the multi-week trading range. Because of this convergence, there is a very strong possibility that a break of that area of support would likely generate significant downward momentum. The red horizontal line on the daily chart below marks support of the trading range, which is only two points below last Friday’s close. The blue ascending line represents support of the uptrend line that has been in place since the low of October 2005. We have circled the convergence point:

It’s fair to say that all eyes will be watching to see how the S&P reacts as it tests key support at the 1,292 to 1,294 area. As for resistance on the upside, quite a bit of overhead supply has now been generated from traders who bought the trading range in anticipation of an eventual breakout.

This week kicks off quarterly earnings season, so be aware of when your positions are reporting their results. In the current environment, a greater than usual amount of volatility could result from earnings surprises. Perhaps the market’s reaction to the earnings reports of keystone companies will finally generate the impetus necessary to kick-start some type of confirmed trend in the broad market.

Today’s Watchlist:

DIA – DIAMONDS (Dow Jones Index)
Short

Trigger = below 110.60 (below support of trading range and uptrend line)
Target = 107.40 (support of Feb. low)
Stop = 112.35 (above 20-day MA)
Shares = 500

Notes = Like the S&P 500, the Dow Jones is also sitting just above support of its multi-week trading range and its primary uptrend line. Further, the uptrend line has converged with the 50-day moving average, which makes the support level even more significant. If DIA breaks this plethora of support, we expect to see a significant drop in the Dow. Selling short the S&P 500 (SPY) on a break of support is also a viable option, but the Dow has been showing more relative weakness than the S&P. Notice how the Dow failed to break out to a new high when the S&P attempted to do so last week.

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 = + $656

IGW long (300 shares from April 6 entry) –
bought 68.23, stop 66.20, target new high (will trail stop), unrealized points = (1.46), unrealized P/L = ($438)

Closed positions (since last report):

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

$38,626

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