The Wagner Daily | April 25, 2006

Commentary:

The Nasdaq continued to build on last Friday’s weakness by registering its third straight day of losses yesterday. This time, the losses spread to the other major indices as well. Relative weakness in the small-cap arena caused the Russell 2000 Index to lead the broad market lower with a 0.8% loss, while both the Nasdaq Composite and S&P Midcap 400 indices fell 0.4%. The S&P 500 lost 0.2% and the Dow Jones Industrial Average closed only 0.1% lower. Unlike the previous session in which the Nasdaq’s losses resulted from a late afternoon selloff, yesterday’s losses were the result of opening weakness. On an intraday basis, stocks traded in a relatively narrow range, drifting from sideways to slightly higher. Each of the major indices closed near the middle of their intraday ranges, indicating a bit of indecision into the close.

The positive of yesterday’s session is that volume levels declined across the board. Total volume in the NYSE was 16% lighter, while volume in the Nasdaq came in 14% below the previous day’s level. This tells us that the losses were more the result of a lack of buying interest as opposed to heavy institutional sell programs. Given that the Nasdaq has had four days of higher volume losses (“distribution days”) within the past four weeks, it would have been rather negative if the Nasdaq fell on higher volume yesterday. A healthy market can generally absorb two to three “distribution days” over the course of several weeks, but the occurrence of more than four or five of them within a month is often an accurate warning sign of greater losses to come. Remember that volume is the footprint of institutional buying or selling activity and is the one technical indicator that never lies!

The Semiconductor Index ($SOX) is one sector we have been keeping a watchful eye on in recent days. Because the sector is so heavily weighted within the Nasdaq, its performance tends to lead the direction of the Nasdaq index itself. Rarely will the Nasdaq maintain an uptrend without the $SOX leading the way. Conversely, it is unusual for the Nasdaq to trend lower if the $SOX is strong. As such, we regularly follow the trend of the $SOX in order to look for confirmation in each of the Nasdaq’s moves. When the broad market spiked higher on April 18, the $SOX was leading the way, and did so in the two days that followed. However, the Nasdaq began to drift back down when the $SOX ran out of gas on April 20. Taking a look at the daily chart of the $SOX, you will quickly see the culprit of the recent change of bias in the Semiconductor sector — resistance of a three-month downtrend line:

As you can see, the $SOX closed back below its 50-day moving average yesterday, but it did manage to close off its lows. If the $SOX holds yesterday’s low and attempts to rally from here, the formation of a “higher low” yesterday could cause the index to generate enough momentum to break out above its downtrend line within the next few days. Obviously, this would be positive for the Nasdaq and the broad market as a whole. However, a break below yesterday’s low would be rather bearish and could easily lead to a resumption of the current downtrend that has been in place since the high of January 27.

Going into today, we remain overly cautious on both sides of the market. The Nasdaq has been showing a lot of relative weakness over the past three days and has given back a majority of its gains from the April 18 breakout, but the S&P and Dow are holding up okay and are still consolidating at resistance of their prior highs. This is certainly not an environment to take an aggressive position on either the long or short side of the market. Instead, consider remaining mostly in cash or, at the very least, simultaneously positioned both long the relatively strong sectors (oil, gold, steel) and short the weak ones (tech, biotech). The market has not clearly shown its hand for the past several months, but it will eventually do so. When it does, expect the move to be fast and furious as traders who have been positioning themselves on the other side of the market for the past several months are forced to reverse direction.

Today’s Watchlist:

There are no new trade setups for today.

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 = + $8

EWW long (300 shares from April 21 entry) –
bought 39.71 (avg.), stop 38.45, target new high (will trail a stop), unrealized points = (0.29), unrealized P/L = ($87)

Closed positions (since last report):

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

$40,234

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