The Wagner Daily


Strength in the small cap and tech stocks helped lift the Nasdaq to a solid gain yesterday, enabling the index to also reclaim its 50-day moving average. After an initial upward thrust in the first hour of trading, both the S&P 500 and Nasdaq Composite traded in a narrow, sideways range throughout the remainder of the session. The Nasdaq showed relative strength for a change, rallying 0.9%, while both the S&P 500 and Dow Jones Industrials gained 0.3%. The small-cap Russell 2000 Index zoomed 0.9% higher and the S&P Midcap 400 Index gained 0.6%. The S&P 500 and Dow Jones both closed near the middle of their intraday ranges, but the other indices finished near their highs.

Unfortunately for the bulls, yesterday’s volume levels failed to confirm the market’s gains. Total volume in the NYSE was the same as the prior day’s level, but volume in the Nasdaq declined by 5%. Obviously, it would have been better to see the market advance on higher volume, as it would have indicated institutional buying interest. It is negative that volume increased when the market fell on Wednesday, but decreased when it rallied yesterday. This is opposite of how a healthy market should act, and we also continue to feel there has been a significant amount of “churning” occurring over the past several weeks. Volume has been coming in higher than average every day, but the major indices have failed to go anywhere. Market internals were positive yesterday, but not to a spectacular degree. In the Nasdaq, advancing volume exceeded declining volume by 2 to 1, but the ratio was slightly lower in the NYSE.

Most major industry sectors closed higher yesterday, with the Oil Index ($XOI) being the only notable exception. So far, our short position in the S&P Select Energy SPDR (XLE), which we sold short on May 3, is working well. The Oil Index did show some strength into yesterday’s close, but we should be okay as long as the index remains below its May 3 high. If not, we are prepared to quickly stop out of the position if XLE breaks out to a new high.

The Gold Index ($GOX) once again cruised to a fresh record high, as a new 25-year high in the price of spot gold pushed the StreetTRACKS Gold Trust (GLD) to an all-time high as well. If the $GOX finishes today above yesterday’s intraday low, the index will have closed higher in each of the past eight weeks! The price of silver has been steadily higher as well, although the new iShares Silver Trust (SLV) has only been trading for five days.

The sector that made the most impressive move yesterday was the Dow Jones Transportation Average ($DJT), which surged 3.3% and closed at a new all-time high. Despite incessantly rising oil prices, the transports have been in a smooth and steady uptrend since breaking out of a one-year sideways range in October of 2005. Yesterday’s breakout in the $DJT was led by shipping company Expeditors Intl. of Washington (EXPD), which rocketed 18% higher after announcing a strong earnings report. Because the iShares DJ Transportation Avg. Fund (IYT) moves in lockstep with the $DJT, it too broke out to a fresh record high. Since the beginning of April, IYT has bumped into resistance at the 85.20 area on several occasions, but that prior resistance level should now act as support on any pullback in IYT:

Just as we bought the first pullback in RKH after it broke out to a new high, we intend to follow the same plan of action in IYT. Assuming it retraces a bit or consolidates its gains over the next few days, we will be looking for a new long entry point in IYT.

If you bought the iShares Mexico Fund (EWW) when we brought it to your attention at the end of April, you may want to consider tightening your stop to protect your profits. EWW is currently showing a gain of just under 7% since it broke out of its consolidation, which is a pretty substantial for an international ETF to make in such a short period of time. Although the uptrend is in no danger of being broken, EWW is likely to experience a short-term correction in the coming days. Consider trailing your stop just below the hourly uptrend line of EWW if you want to play it tight and not ride out the first correction.

The Semiconductor Index ($SOX), which we analyzed in yesterday’s Wagner Daily, rallied 1.3% and closed above resistance of its upper channel. The move was not enough to declare it a significant volatility expansion, but it may be the start of one. The April 20 high of 535 is the magic number that the $SOX needs to close above. If it does, it could take off to new highs and pull the Nasdaq along with it:

Finally, we want to remind you about the newfound weakness in the Securities Broker-Dealer Index ($XBD). As you may recall, we recently pointed out that on May 1, the $XBD Index closed below support of its 50-day moving average for the first time since October 18, 2005. Since then, the index has edged only slightly higher off its May 1 low and has formed a “bear flag” on its daily chart. As such, we expect another leg down in this index within the next one to two days. We plan to short a couple of the broker-dealer stocks when the $XBD breaks below yesterday’s low. Such a move should lead to a resumption of the short-term downward momentum:

Nothing really new with the major indices, as they remain in the same choppy, sloppy trading ranges. Therefore, take it easy with buying new positions until the broad market convincingly breaks out to new highs. Until then, you should view every rally attempt with suspicion. Above all, trade what you see, not what you think!

Today’s Watchlist:

UTH – Utilities HOLDR

Trigger = above 114.78 (over the May 2 high and the 200-MA)
Target = 119.95 (just below the high of January 25)
Stop = 112.45 (below support of prior downtrend line and 50-MA)
Shares = 200

Notes = UTH did not yet trigger, but remains on our watchlist for potential entry today. Consult the May 3 Wagner Daily for detailed explanation of the trade setup.

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):

      IYR short (400 shares from April 24 entry) –
      sold short 71.04, stop 71.77, target 67.10, unrealized points = + 0.70, unrealized P/L = + $280

      XLE short (400 shares from May 3 entry) –
      sold short 58.66, stop 59.95, target 54.05, unrealized points = + 0.48, unrealized P/L = + $192

      RKH long (100 shares from May 4 entry) –
      bought 153.70, stop 150.65, target new high (will trail a stop), unrealized points = + 0.03, unrealized P/L = + $3

    Closed positions (since last report):


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



      The RKH setup triggered yesterday, but UTH did not. UTH remains on our watchlist for today.

    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