The Wagner Daily | May 26, 2006

Commentary:

The broad market followed up on Wednesday’s bullish reversal with a session of solid gains yesterday, enabling the major indices to register their best gains in over a month. The small-cap Russell 2000, which bounced off support of its 200-day moving average the previous day, led the way with a 2.0% gain. The Nasdaq Composite advanced 1.3%, the S&P Midcap 400 1.2%, and the S&P 500 1.1%. The Dow Jones Industrial Average, which we remain short, showed the most relative weakness and gained only 0.8%. For the first time since the selloff began several weeks ago, each of the major indices finished at their intraday highs.

Yesterday’s gains were certainly a welcome relief to bulls who have been suffering through recent times, but one problem with the rally was that volume fell significantly in both exchanges. Total volume in both the NYSE and Nasdaq was 24% lighter than their previous day’s levels. Obviously, it would have been more positive if higher volume had confirmed such solid gains. Instead, it seems the bears were simply taking a break from the heavy selling as opposed to the institutions heavily buying stocks. Nevertheless, market internals indicated very positive breadth. In the NYSE, advancing volume exceeded declining volume by a wide margin of 6 to 1. The Nasdaq ratio was positive by nearly 4 to 1.

Despite yesterday’s rally, the overall picture for the broad market remains pretty bleak. On a technical level, most stocks and ETFs now have badly damaged chart patterns and will require at least several weeks (probably longer) to recover to valid buy points. Many former high flyers have dropped 30% to 40% off their highs and may never recover. All that happened yesterday was many stocks and ETFs rallied closer to key resistance levels. After scanning thousands of stocks last night, we came across only a handful that would offer a positive risk/reward ratio for buying at current levels. Putting this in perspective, the odds of having a profitable trade on the long side are clearly against you. The strongest stocks in the market have merely traded in a sideways range over the past two weeks, meaning you could break even or realize a small profit at best. The potential downside, however, is that you could end up buying stocks right before the broad market slides back down to the lows. When the “real” bottom eventually comes, there will be plenty of confirming signals to tell us so, but feeding your ego by trying to pick the bottom without confirmation is just plain foolish.

Because today precedes a three-day holiday weekend, we are likely to see a drop in turnover. As such, you are probably better off to wait until Tuesday, after the holiday has passed, to enter any new ETF or stock trades. With many traders absent from their desks today, we may not see the true intentions of the “smart money” until next week. Instead of entering new trades, spend some time preparing a “hit list” of potential short setups if the market resumes its strong downtrend next week. The best thing about yesterday’s rally is that it provides us with better risk/reward levels for new trade entries on the short side. After we see how well stocks retain yesterday’s gains, we will be prepared with our list of the best looking ETFs for potential entry next week. We will also take an updated look at which industry sectors are showing the most relative strength and weakness to the the broad market.

NOTE: The U.S. stock markets will be closed on Monday, May 29 in celebration of the Memorial Day holiday. As such, The Wagner Daily will not be published that day. Regular publication will resume on Tuesday, May 30. Enjoy the long weekend!

Today’s Watchlist:

TLT (iShares 20+ yr. T-Bond Fund)
Long

Trigger = above 84.82 (over yesterday’s high)
Target = 89.20 (resistance of prior highs from March)
Stop = 83.58 (below 20-day MA and May 23 low)
Shares = 400

Notes = As discussed a few days ago, the fixed-income ETFs are forming a base and positioned to break their downtrend lines. We are looking to buy a rally up to resistance of the prior high in TLT. There is a 50-day moving average overhead, but we feel the momentum from a break above the highs of this base should easily push TLT through it. Other bond ETFs such as IEF have equally nice or even better chart patterns, but the problem is that they have VERY low volatility that ties up a lot of capital for such a small upside potential. If, however, you have a large trading account, you might consider IEF over TLT, but we will be tracking TLT because it has a better average true range (ATR).

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 = ($178)

Closed positions (since last report):

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

$28,013

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