The Wagner Daily | April 12, 2006

Commentary:

After nearly a month of bouncing around in an erratic, sideways trading range, the S&P 500 finally made a decisive move lower and out of the “chop zone.” The other major indices followed suit, as stocks began the day with an opening gap up, but swiftly reversed and trended steadily lower throughout the day. Losses were most pronounced in the Nasdaq Composite and small-cap Russell 2000 Index, which fell by 1.0% and 1.4% respectively. The S&P Midcap 400 Index also lost 1.0%, but relative strength in Alcoa helped minimize the Dow’s loss to only 0.5%. The S&P 500 shed 0.8%. The broad market bounced off its worst levels of the session during the last thirty minutes of trading, but such an intraday correction is typical when stocks are trending down for so many hours. Although most investors were probably hoping for an upside breakout to new highs in the broad market, we as technical traders were simply pleased to see a move out of the range in either direction. Remember that both uptrends and downtrends present consistently profitable trading opportunities to short-term traders, but choppy, range-bound markets are always the most challenging.

As we usually see when the markets make a substantial move out of a range, volume spiked in both exchanges. Total volume in the NYSE rose by 15%, while volume in the Nasdaq was 13% higher than the previous day’s level. The broad-based losses on higher turnover gave both the S&P and Nasdaq a bearish “distribution day” that indicated institutional selling. Firmly negative market internals confirmed the distribution. In both exchanges, declining volume exceeded advancing volume by a margin of approximately 4 to 1. Looking forward, it will be important to see whether there is further institutional selling into strength after the broad market’s next bounce or if yesterday’s price to volume ratio was merely a one day aberration.

As in the recent April 7 selloff, every major industry sector we follow on a daily basis closed lower yesterday. One of the biggest losers was the Biotech Index ($BTK), which continued its slide with another 1.9% loss yesterday. The relative weakness enabled us to trail a tight stop and cover the remaining shares of our Biotech HOLDR (BBH) short position for a gain of more than 7.5 points ahead of Genentech’s earnings announcement after the close. The Semiconductor Index ($SOX), which began showing relative weakness and attempted to break out only five days ago, dropped 1.5% and has since completely rolled back over. The Gold Index ($GOX) and Oil Service Index ($OSX), which lost 2.4% and 1.9% respectively, were also among yesterday’s weakest sectors. However, the charts of both sectors show yesterday’s losses as more of a normal correction than a bearish reversal. Although each industry corrected sharply yesterday, Gold, Oil, Metals, and Mining remain among the strongest sectors right now.

Of course, the most significant technical event that occurred yesterday was the S&P 500’s breakdown below its six-month uptrend line. As you may recall, we have had our eye on that area of support around 1,291 ever since the April 7 selloff. As the daily chart below illustrates, yesterday’s loss caused the index to close below support of both its four-week trading range and its primary uptrend line that had been intact since October of 2005:

While the break of such a key trendline is certainly bearish, the S&P may attempt to bounce from here due to the close proximity of its 50-day moving average, which it closed only a few points below yesterday. If the index does attempt to reverse, you can expect prior support of that uptrend line to now act as the new resistance. If, however, support of the 50-day MA fails to even yield a significant bounce, that will tell us a lot about the new sentiment of the market. The stock market’s reaction to upcoming earnings reports will also do the same.

As for new trade setups, yesterday’s action caused our overall short-term bias to shift from neutral to cautiously bearish. As mentioned earlier, there are only a few sectors that still have healthy charts. Both the StreetTRACKS Gold Trust (GLD) and the Oil Service HOLDR (OIH) remain in solid uptrends, but they could easily correct lower or consolidate for a few more days before resuming their strength. Other than those, we now see very few long setups that present a positive risk/reward ratio for entry. The S&P Select Financial SPDR (XLF) is one such example of how many sectors that were recently consolidating near their highs have swiftly begun to roll over:

Like XLF, many sector ETFs have broken or are poised to break support of their recent trading ranges. Unless you are a daytrader looking to play only a small bounce, it is now rather risky to buy a setup that looks like XLF. But on the other hand, the big drop of the past three days means that new short setups are not at ideal entry points either. For new short entries, we would ideally like to see another day or two of weakness, followed by a weak bounce early next week. Such a retracement would then provide us with a positive risk/reward ratio for new short entries, while at the same time having additional confirmation that a new downtrend may be shaping up.

Today’s Watchlist:

There are no new setups for today. We have our eyes on a few possible short entries, but we would like to see a bit more weakness, then short the next bounce. Shorting at current levels does not present an ideal risk/reward ratio.

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 = ($125)

Closed positions (since last report):

net P/L = + $764

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

$55,465

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