The Wagner Daily | August 2, 2006

Commentary:

Traders kicked off August in a bearish mood, as the broad market sold off on higher volume yesterday. Each of the major indices gapped down below their previous day’s lows, then promptly fell further throughout the first hour of trading. Stocks then oscillated in a sideways range throughout most of the session until a modest wave of buying in the final thirty minutes lifted the indices off their lows. Still, the Nasdaq Composite lost 1.4% and the small-cap Russell 2000 slid 1.5%. Both the S&P 500 and Dow Jones Industrial Average showed relative strength, as each index closed only 0.5% lower. The S&P Midcap 400 shed 0.8%. Despite the closing losses, the buying interest into the close helped the broad market to recoup a large portion of its intraday losses, and also enabled each of the major indices to finish near the middle of their intraday ranges.

Total volume in the NYSE increased by 6% yesterday, while volume in the Nasdaq was 2% higher than the previous day’s level. The broad-based losses combined with the higher volume caused both the S&P 500 and Nasdaq Composite to register a “distribution day” that was indicative of institutional selling. It was the second such day of higher volume losses within the past four sessions. If you have been paying attention to our daily volume analysis of the broad market, yesterday’s higher turnover should not have come as a surprise. Considering that volume has been light and decreasing on most of the market’s “up” days in recent weeks, it makes sense that volume would accelerate on many of the “down” days. This bearish price to volume ratio “under the hood” of the stock market shows that hedge funds, mutual funds, and other institutions remain biased on the sell side. Only a sudden shift to higher volume “up” days and lighter volume “down” days would indicate the return to a positive sentiment. Market internals were also firmly negative yesterday, particularly in the Nasdaq. Declining volume in the Nasdaq exceeded advancing volume by a margin of 7 to 1. The NYSE ratio was negative by 2 to 1.

Only a few industry sectors finished in higher territory yesterday, but those that did made substantial moves. The biggest gainer of the major sectors we follow was the Gold and Silver Sector Index ($XAU), which zoomed 2.5% higher and broke out above resistance of a seven-week downtrend line:

In the August 1 issue of The Wagner Daily, we illustrated the bullish setup in the iShares Silver Trust (SLV). As anticipated, SLV broke out and rallied more than 3%, alongside of yesterday’s strength in the $XAU index. We notified subscribers beforehand that we planned to buy SLV on a rally above the $115.05 level, which happened shortly after the open, so we are now long SLV with a marked-to-market gain of approximately 2.5 points. The iShares Gold Trust (GLD) similarly rallied 2% yesterday, but we bought the silver ETF instead because it is showing more relative strength than gold. Taking an updated look at the daily chart of SLV below, you will notice there is little overhead resistance until the prior high of $133.60 that was set on May 30. That area of resistance is our profit target on the trade:

Along with gold and silver, the DJ Utilities Average ($DJU) also outperformed the market yesterday. After four days of sideways consolidation in a tight range, the $DJU rallied 1.1% and closed at a fresh 52-week high. The Utilities HOLDR (UTH) has a very similar chart pattern to the $DJU and also closed at a new 52-week high. Notice how higher volume also confirmed the move. UTH traded more than double its average daily volume yesterday:

One reason for the broad market’s weakness yesterday is that the Semiconductor Index ($SOX) reversed after rallying into resistance of its primary downtrend line. Recall that we were focused on whether or not the $SOX would break out above its multi-month downtrend line, but so far it has not. The $SOX downtrend remains intact for now, but a swift reversal back above that downtrend line would likely give the overall market a bullish shot in the arm. Notice how the downtrend line in the $SOX perfectly acted as resistance yesterday:

Based on the bearish “head and shoulders” pattern in the iShares Russell 2000 (IWM) that we recently illustrated, we entered a new short position in IWM yesterday. If it follows through with a break below the “neckline” at the 66.50 area, it should lead to substantial downward momentum, but we have a protective stop just above the high of the right shoulder (and the 200-day MA) in case the pattern fails. By the way, remember that the new ProShares family of ETFs enable you to take a bearish position on the broad market without being required to sell short. The ProShares Short QQQ (PSQ), for example, actually gained 1.7% while the Nasdaq 100 Index lost 1.6%. These new ETFs are a great way to take bearish positions in your non-marginable retirement accounts that do not allow you to sell short. A complete list of the ProShares ETFs can be found on the “specialty ETFs” section of the Morpheus ETF Roundup guide.

Today’s Watchlist:

There are no new setups for today, as we now have three open positions.

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 = + $251

LQD long (400 shares from July 20 entry) –
bought 104.08, stop 103.35, target 106.20, unrealized points = + 0.13, unrealized P/L = + $44

IWM short (250 shares from August 1 entry) –
sold short 68.65, stop 71.35, target 61.70, unrealized points = + 0.06, unrealized P/L = + $15

Closed positions (since last report):

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

$70,591

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