The Wagner Daily | July 26, 2006

Commentary:

Early morning strength in the broad market faded quickly yesterday, sending stocks into negative territory, but a moderate buying spree into the close pushed the broad market back towards its intraday highs. Both the S&P 500 and Nasdaq Composite advanced 0.6%, as the Dow Jones Industrial Average gained 0.5%. The small-cap Russell 2000 Index rallied 1.0% and the S&P Mid-cap 400 Index gained 1.2%.

This time, higher turnover helped to confirm the gains in both exchanges. Total volume in the NYSE increased by 11%, as volume in the Nasdaq was 1% higher than the previous day’s level. The gains on higher volume made yesterday a bullish “accumulation day” that hinted at the return of institutional buying activity. Market internals were positive as well. In the NYSE, advancing volume exceeded declining volume by a margin of more than 5 to 2. The Nasdaq ratio was positive by nearly 2 to 1.

In yesterday’s Wagner Daily, we pointed out the relative strength in the Pharmaceutical sector ($DRG), which broke out of a base of consolidation. Another sector that recently did the same is the Utilities ($DJU). While the S&P 500 has been trending sideways to lower, the $DJU index has been grinding its way higher. It is interesting that the sector closed yesterday at its highest level since October of 2005 because that was the period when the S&P and Nasdaq were at their lowest levels. As we often see, the Utilities are again acting as a defensive play for investors who flock to the safety of minimal capital gains with high dividend levels. All of the Utilities ETFs listed on our ETF Roundup guide have similar chart patterns, but the Utilities HOLDR (UTH) is one of the most well-known ETFs that tracks the sector. The weekly chart below shows how UTH closed just below its 52-week high that was set last October:

Another ETF that has come onto our radar screen as a potential long entry is the iShares Xinhua China 25 Fund (FXI). This ETF, which is kind of like China’s version of the Dow Jones Industrial Average, corrected along with the U.S. markets from May through mid-June. However, FXI has been showing relative strength this month, as it stopped going down when the S&P and Nasdaq did. Instead, it began to consolidate just above its 50-day moving average. We like this chart pattern because a breakout above the consolidation will probably cause FXI to rally to its 52-week high and possibly break it. Regular subscribers will see our trigger, stop, and target prices for this setup we are stalking for potential entry. The daily chart below illustrates the setup:

As for the broad market, it is noteworthy that the S&P 500 closed yesterday back above its 50-day moving average. The Nasdaq, however, has made up little ground and remains near its low. Going into today, expect the S&P 500 to find resistance at its July 3 high of 1,280. The Nasdaq will find major resistance at the 2,135 area, as it marks convergence of its 50-day moving average with its primary downtrend line. If either index manages to rally above those levels, it could generate substantial upside momentum in the markets, but we continue to treat the gains of the past two days as a bear market bounce until that happens.

If you’re long, be sure your positions are in the industry sectors that are showing the most relative strength to the market. Pharmaceuticals, Healthcare, and Utilities are showing relative strength by outperforming the market on the “up” days and barely dropping on the market’s “down” days. The pharmaceutical ETFs may have quite a bit more upside momentum because the sector has been beaten down for so long. Conversely, anything tech-related is the sector to avoid or consider selling short into a bounce. As usual, earnings season has caused a lot of volatility out there, but the technical patterns will begin working well again in another week or so, after most of the big names have reported.

Today’s Watchlist:

FXI – iShares Xinhua China 25
Long

Trigger = above 78.58 (above the high of the consolidation)
Target = new high (will trail stop)
Stop = 74.65 (below the hourly uptrend line)
Shares = 200

Notes = See the commentary above for an explanation of the setup.

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 = ($16)

Closed positions (since last report):

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

$41,616

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