The Wagner Daily | June 15, 2006

Commentary:

The Nasdaq Composite snapped its eight-day losing streak, as the major indices posted a session of solid gains yesterday. Stocks drifted sideways to lower throughout most of the day, but buyers stepped in during the final thirty minutes and enabled the major indices to finish near their intraday highs. The Nasdaq Composite gained 0.7%, the S&P 500 rallied 0.5%, and the Dow Jones Industrial Average advanced 1.0%. The small-cap Russell 2000 and S&P Midcap 400 indices closed higher by 0.7% and 0.5% respectively.

Unfortunately for the bulls, turnover fell across the board. Total volume in the NYSE was 14% lighter than the previous day’s level, while volume in the Nasdaq declined by 15%. A session of gains on higher volume would have hinted at institutional buying interest, but a rally on lighter volume should be viewed with a suspicious eye when the markets are in such a firm downtrend. Nevertheless, yesterday was still a reversal attempt and could lead to a better performance in the next day or two. We’ll be closing watching the market’s relationship between price to volume in order to determine whether or not we are seeing any legitimate signs of institutional demand or merely a technical bounce from the selloff. Market internals were positive yesterday, as advancing volume exceeded declining volume by a ratio of approximately 2 to 1 in both exchanges.

As of the time of this writing, both the S&P and Nasdaq futures are gapping higher in the pre-market. If the gap holds, the major indices will be poised to open above yesterday’s highs, which could result in a bit of upward momentum off the lows. Obviously, the broad market remains firmly in an intermediate-term downtrend, but stocks could still bounce significantly without technically violating the current downtrend. The positive is that the downtrend of the past five weeks has formed clearly defined trendlines that will act as resistance. If you wish to play the bounce with the broad-based ETFs, it is important that you are aware of the levels at which the major indices will run into that resistance. Therefore, let’s take an updated look at where the downtrend lines (the dotted blue lines) are positioned on the charts. Below are daily graphs of the S&P 500 SPYDER (SPY), Nasdaq 100 Index Tracking Stock (QQQQ), and the Dow Jones DIAMONDS (DIA). SPY is first:

The primary downtrend line in SPY begins with the highs of May 10. If SPY rallies up to resistance of that downtrend line, it will probably have also converged with resistance of the 200-day moving average (the orange line) in the same vicinity. The convergence of both a five-week downtrend line AND a 200-day moving average will act as powerful overhead resistance, so we clearly view any rally into that area as a chance to sell long positions and perhaps initiate new short positions. Next, take a look at QQQQ:

Comparing the charts of QQQQ and SPY, you can easily see the relative strength that the Nasdaq had ahead of the S&P’s May selloff. Notice how QQQQ was already below its multi-year high when the selloff in the S&P began on May 10. But in keeping with comparison of the same timeframe as the S&P selloff, we have drawn the trendline from the May 10 high. Notice how the 20-day moving average converges in the same area as the downtrend line. This is also the case with DIA:

As you can see, each of the three broad-based ETFs above have a bit of room to bounce before running into any major resistance. However, we strongly recommend that long positions be sold into strength on any rally into resistance of those downtrend lines. Obviously, the downtrend lines could be broken at any time, but our job is to analyze and react, not predict when current market trends will change. Accordingly, we must assume the downtrend lines of the past five weeks will remain intact until the market proves otherwise. For now, we think any long positions need to be entered with the mindset of being short-term counter-trend trades. But if the major indices generate enough power to break their downtrend lines, then we will simply re-assess market conditions and determine which sectors are showing the most relative strength. Until that happens, we will remain mostly positioned in cash, holding off on new short entries, and perhaps testing the waters on the long side of the market, albeit with a brief time horizon.

Today’s Watchlist:

TTH – Telecom HOLDR
Long

Trigger = above 29.08 (above the June 13 high)
Target = new high (will trail stop)
Stop = 28.11 (below the prior low of May 31)
Shares = 700

Notes = The Telecom sector is one of the only industries that has shown relative strength to the broad market during its recent selloff. Therefore, we expect it to be one of the first sectors to rally higher when/if the broad market bounces. Due to the chart pattern of buying a break out above consolidation, we will be buying at market if it gaps up, rather than using the MTG Opening Gap Rules (which are mostly for countertrend gaps).

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 = + $93

Closed positions (since last report):

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

$27,196

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