The Wagner Daily


Another quarter-point interest rate hike by the Federal Reserve Board sent the Nasdaq lower yesterday, causing the index to register its second consecutive “distribution day.” When the Feds announced the rate hike and outlook going forward, the broad market initially became very volatile, causing the major indices to whip violently in both directions. The Nasdaq eventually closed near its intraday low and lost 0.8%, but the S&P recovered off its low and slipped only 0.2%. The Dow Jones Industrials continued to exhibit relative strength by finishing unchanged, but the small-cap Russell 2000 mirrored the Nasdaq’s weakness and lost 0.6%. The S&P Midcap 400 declined 0.2%.

The most troubling thing about yesterday’s action was that the Nasdaq fell victim to its second straight day of institutional selling. Total volume in both the Nasdaq and NYSE exchanges was 6% higher than the previous day’s levels. As such, the S&P also registered a bearish “distribution day,” but there have been far more days of institutional selling in the Nasdaq than in the S&P and Dow. How many more days of institutional selling can the Nasdaq withstand before the index collapses from the overhead supply? Obviously, nobody knows for sure, but all of this corresponds to what we have been saying over the past week — avoid the tech sectors because the Nasdaq has been showing so much relative weakness.

If you downloaded and checked out our new ETF Roundup that was announced yesterday, you probably became aware of numerous exchange traded funds that you never knew existed. One such ETF that many traders are not aware of, yet has been acting great, is the PowerShares Lux Nanotech Fund (PXN). This ETF, which is comprised of various stocks associated with nanotechnology, has been in a steady uptrend since its launch in October 2005. We have illustrated this with trendlines on the weekly chart below:

If you drill down to a shorter-term daily chart, you will also see that PXN has corrected over the past three days and closed yesterday right at support of its 10-day moving average. Further support of its 20-day moving average is just below that:

Although we discuss the 20 and 50-day moving averages more frequently, the 10-day moving average is useful for anticipating support levels on stocks and ETFs that have entered a strong uptrend. Often, we will make our initial buy entry of partial position size when an ETF when it retraces down to support of its 10-day MA. If it continues a bit lower, we usually will add to the position around the 20-day moving average. If, however, it turns back up at the 10-day MA, we typically just remain with a partial position size. Note that when adding to a position as it pulls back further, this is different than averaging down on a losing position because our initial plan from the first entry was to add on a further retracement. The key is just to make sure that adding was part of your initial plan and not something you did because you are “hoping” that a losing position will come back to your entry price.

Taking an updated look at the major industry sectors, it is good to see that the DJ Utilities Average ($DJU) bounced off new support of its 200-day moving average yesterday. As you may recall, we bought the Utilities HOLDR (UTH) when it broke out on May 5 because it had a similar chart pattern to $DJU. The current daily chart of UTH below is a great example of how a prior resistance level becomes the new support level after the resistance is broken.

The Gold Index ($GOX) keeps on chugging along, steadily setting fresh 25-year highs. Spot gold rose over $700 per ounce this week, pushing the Gold Trust (GLD) along with it. Although gold certainly remains in a strong uptrend, it is a bit risky to initiate new positions in GLD or any of the mining stocks at current levels. If, however, you were clever enough to already be long, there is no need to pick a top. Instead, consider just tightening your stops to below support of the hourly uptrend lines. Transportation ($DJT), Banking ($BKX), and Retail ($RLX) are two other sectors that continue to show solid relative strength. The $RLX Index is now consolidating near its 52-week high, so keep an eye out for a potential breakout in that sector.

On the downside, the biggest problem area is the Semiconductor Index ($SOX). Throughout the latter half of last week, it looked as it the $SOX was building up momentum for an upside break out of its long trading range. However, the action of the past three days has been quite negative and all bets are off on the $SOX Index. Looking at the daily chart of the $SOX below, notice how it failed last week’s breakout attempt and has dropped back below its 50-day moving average:

Without a doubt, the recent weakness in the $SOX has weighed heavily on the Nasdaq. Both the Networking Index ($NWX) and Computer Hardware Index ($HWI) have also begun to roll over, but the Internets ($GIN) may be putting in a base of support here. The Broker-Dealer Index ($XBD), which we discussed extensively last week, closed yesterday at a three-day low. That sector may see further downward momentum, at least down ot its prior low. As per the ETF Roundup, IAI and KCE are two exchange traded funds that track the broker-dealer sector.

Today’s Watchlist:

We have a few setups we are stalking for potential entry, but want to see the real reaction to yesterday’s Fed decision before listing pre-market trigger prices. We will send an intraday e-mail alert to inform of any new 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):

      UTH long (200 shares from May 5 entry) –
      bought 115.65 (avg.), stop 112.45, target 119.95, unrealized points = (0.05), unrealized P/L = ($10)

      XLE short (400 shares from May 3 entry) –
      sold short 58.66, stop 59.56, target 54.05, unrealized points = (0.84), unrealized P/L = ($336)

    Closed positions (since last report):


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



      Per intraday e-mail alert, we tightened the stop on XLE. Since entering the position, XLE has formed a “higher low” and is now consolidating near the highs, so we are reducing our risk by lowering the stop. As always, remember to use the MTG Opening Gap Rules if XLE gaps up above our stop.

    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