The Wagner Daily | July 5, 2006

Commentary:

Despite a shortened trading session, the major indices posted solid gains ahead of the Independence Day holiday. The broad market gapped higher on Monday’s open, then settled into a steady intraday uptrend until the 1:00 pm EDT closing time. The Nasdaq Composite, S&P 500, and small-cap Russell 2000 indices each gained 0.8%, while both the Dow Jones Industrial Average and S&P Midcap 400 rallied 0.7%. Both the S&P 500 and Dow Jones Industrial Average closed back above their 50-day moving averages and are nearing resistance of their prior highs from June 2. All three of our open ETF positions advanced as well. We sold half the shares of our StreetTRACKS Gold Trust (GLD) position for a 3.5 point gain because it gapped to near our original price target of the 50-day moving average. We are trailing a stop on the remaining shares of GLD to maximize profit and protect our gain. Our other two open positions, the Telecom HOLDR (TTH) and the iShares DJ Real Estate Index (IYR), both closed at their best prices in several months and continued to approach their 52-week highs.

Turnover was obviously lower in Monday’s brief session. Total volume in the NYSE declined by 67%, while volume in the Nasdaq was 78% lighter than the previous day’s level. Accounting for the early closing time, volume levels were still lighter. Compared to 1:00 pm the prior day, 12% less shares traded hands in the NYSE and 17% less in the Nasdaq. Considering that many traders probably extended their holiday weekend and skipped Monday’s session altogether, the turnover levels were pretty decent. So were market internals. Advancing volume in the NYSE exceeded declining volume by a margin of 3 to 1. The Nasdaq ratio was positive by 2 to 1.

Shortened pre-holiday sessions are often quiet and uneventful, but that was not the case on Monday. Conversely, it was a continuation day that built on the gains of June 29. More importantly, quite a few leading stocks broke out of strong bases and exceeded the gains in the major indices by a wide margin. A strong market always exhibits leadership by having the strongest stocks break out to new highs ahead of the major indices. We have seen this over the past few days, but there is a lack of consensus on whether or not any clear sector leadership has developed overall.

One ETF that has begun to show relative strength and may soon break out is the DB Commodity Index (DBC). Like nearly every other exchange traded fund, DBC corrected off its highs when the broad market sold off throughout May and most of June. However, it showed relative strength by falling less than the major indices and confirmed that strength by outpacing the recovery of the broad market as well. DBC has closed higher in five of the last six sessions and recovered back above its 50-day moving average on Monday. There is horizontal price resistance at its current price level, so it will probably take a rest for at least a few days, but we are expect an eventual breakout and test of its prior high:

If DBC consolidates from here, it will form the handle of a short-term “cup and handle” chart pattern. If such a bullish pattern forms, the ideal buy point would be over the high of the “handle,” which would most likely be the $26 to $26.50 area. We will keep an eye on how DBC develops over the next week and will let you know if it presents a proper entry point. Two other commodity-based ETFs, the U.S. Oil Fund (USO) and the StreetTRACKS Gold Trust (GLD), have both made decent gains over the past week, but may take a break as well.

We normally focus purely on technical analysis and do not discuss geopolitical news, but there is one news item that may cause a bit of indecision and volatility in the markets today. Reports that North Korea tested six short-range and one long-range missiles yesterday has resulted in a downside gap in both the S&P and Nasdaq futures in the pre-market. A healthy market will often ignore news that would otherwise be perceived as negative, but bear in mind that stocks still have a lot of overhead supply from the prior selloff. As such, the markets may currently be more susceptible to negative news events. No definite change of plan is required solely because of this news, but just be prepared for a potentially indecisive and whippy session as traders digest the impact of the news.

Today’s Watchlist:

There are no new setups today.

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 = + $637

IYR long (400 shares from June 30 entry) –
bought 71.33, stop 69.62, target 74.90, unrealized points = + 1.21, unrealized P/L = + $484

GLD long (125 shares from June 21 entry) –
bought 58.61, stop 58.40, target 63.40, unrealized points = + 3.57, unrealized P/L = + $446

Closed positions (since last report):

net P/L = + $446

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

$57,789

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