The Wagner Daily | June 19, 2006

Commentary:

The broad market finished the week on a negative note last Friday, but the major indices still retained most of their gains from the previous day’s rally. Stocks sold off throughout the morning session, reversed in the afternoon, but drifted back down in the final thirty minutes of trading. The Dow Jones Industrial Average was unchanged, but the Nasdaq Composite fell 0.7% and the S&P 500 lost 0.4%. Small caps lagged behind, as the Russell 2000 slid 1.1%. The S&P Midcap 400 dropped 0.4%. For the week, the major indices were mixed. The Dow Jones Industrial Average showed the most relative strength by gaining 1.1%, but the Nasdaq Composite and S&P 500 closed lower by 0.2% and 0.1% respectively.

Turnover increased in both exchanges last Friday, causing the Nasdaq and S&P to register another bearish “distribution day.” Total volume in the Nasdaq rose by 9%, while volume in the NYSE was 2% higher than the previous day’s level. Although volume levels were higher, note that last Friday was “quadruple witching” options expiration day. The simultaneous quarterly expiration of stock index futures, stock index options, stock options and single stock futures typically results in higher volume levels in the market. Nevertheless, it was negative that a “distribution day” followed the previous session’s “accumulation day” in the Nasdaq. As you may recall, volume in the NYSE failed to increase on June 15 despite a 2.1% gain in the S&P 500. Overall, last week’s price action in the broad market was an improvement over the bearishness of previous week’s but volume patterns have yet to indicate a clear return of institutional buying.

In the middle of last week, we illustrated the levels at which each of the major indices would run into resistance of their primary downtrend lines. After the June 15 rally, several of the indices came within striking distance of those downtrend lines, but none of them have yet to actually test their resistance levels. Most likely, we will see that happen this week. Looking at the daily chart of the Nasdaq Composite, notice how the index remains below its daily downtrend line:

Like the Nasdaq, the S&P 500 also remains below its primary downtrend line, but also has additional resistance of its 200-day moving average to contend with. This is circled in pink on the chart below:

Although not illustrated on the chart above, the 200-day moving average also converges with the 38.2% Fibonacci retracement level from the May 9 high down to the June 14 low. Based on recent price action, it will be difficult for the S&P to rally above such a confluence of resistance, but odds are good that the index will at least probe above that level on an intraday basis. A powerful wave of institutional accumulation could enable the S&P to blast through its resistance, but the market has not yet given us any reason to believe this will actually occur. Considering the vast amount of technical damage in practically every industry sector, there simply does not seem to be any impetus for institutions to suddenly begin heavy buy programs. Remember that it is always wiser to assume that established trendlines will remain intact until the market proves otherwise.

Our plan of action as we enter the new week is to view the current rally as both a chance to sell long positions into strength and initiate new short positions at low-risk price levels. If the major indices happen to break out above their downtrend lines, we can quickly cover any new short positions for small losses. But if the major indices fail the test of their downtrend lines and resume their six-week downtrends, we will have established short positions at prices that provide the optimum risk/reward ratio. Presently, we are positioned mostly in cash and taking a “wait and see” stance over the next few days. Our only open ETF positions are the Telecom HOLDR (TTH) and the iShares 20+ year T-Bond Fund (TLT), both of which we are long. TTH still has a moderately bullish chart pattern and continues to show relative strength to the broad market, while TLT is showing a small loss, but holding above support of its 50-day moving average. We are also stalking several of the broad-based ETFs for potential short entries if they fail the June 15 rally attempt, but it may be too soon to aggressively sell short right now without first seeing the confirmation of the trend resumption. As always, we will e-mail subscribers of any new ETF positions that we enter on an intraday basis.

Today’s Watchlist:

There are no new setups for today (see commentary in the preceding paragraph).

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 = + $301

TLT long (320 shares from June 2 entry) –
bought 84.70, stop 83.85, target 89.45, unrealized points = (0.39), unrealized P/L = ($125)

Closed positions (since last report):

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

$47,643

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