The Wagner Daily | August 16, 2006

Commentary:

As we have seen numerous times throughout the past two weeks, stocks gapped higher yesterday morning, but this time the gains actually held up throughout the session. The broad market trended higher throughout the morning, consolidated for a few hours during the doldrums, then resumed its intraday uptrend in the final ninety minutes of trading. Each of the major indices racked up solid gains and finished at their highest levels of the day. The Nasdaq Composite zoomed 2.2% higher, the S&P 500 rallied 1.4%, and the Dow Jones Industrial Average gained 1.2%. Small and mid-cap stocks led the market for a change. The Russell 2000 surged 2.4% and the S&P Midcap 400 finished 1.9% higher.

It was also positive to see that higher volume finally confirmed a day of broad-based gains. Total volume in the NYSE rose by 9%, while turnover in the Nasdaq was 19% above the previous day’s level. The gains on higher volume enabled both the S&P 500 and Nasdaq Composite to register bullish “accumulation days,” but it is important to note that volume in both exchanges was still below 50-day average levels. Considering how choppy and indecisive the market has been lately, it would have been better to see a clear signal that institutions have unequivocally begun buying stocks. But one simply cannot make that conclusion when turnover failed to even exceed average levels on a day when the major indices moved firmly higher. Obviously, this seasonally slow time of the year is going to have a major bearing on volume levels, but that is all the more reason to be cautious with any new trades.

On a technical level, there were a few interesting changes that occurred as a result of yesterday’s strength. Foremost, the Semiconductor Index ($SOX) rallied 3.7% and broke out above a 3-week sideways range. It also closed above its 50-day moving average for the first time since the selloff began in early May:

Although momentum should carry the semiconductor stocks higher in the short-term, remember that false breakouts are common in an overall weak market. Therefore, astute traders will wait for confirmation that the breakout in the $SOX will hold for more than a day before initiating new long positions. If the $SOX proves it will hold, several of the semiconductor ETFs will present buying opportunities, but selling into strength of the first leg up is advisable due to the amount of overhead resistance that remains. As the Morpheus ETF Roundup shows, there are presently four different ETFs that are correlated to the $SOX. Their ticker symbols are: SMH, IGW, PSI, and XSD. Of the four, IGW (iShares Semiconductor Fund) is showing the most relative strength because it is the only one that has both rallied above its 50-day MA and closed above the high of its multi-week consolidation. The Semiconductor HOLDR (SMH) also looks pretty good because it popped above its 50-day MA, but it remains just below its August 4 high. If you buy any of these semiconductor ETFs, set a target by using Fibonacci price retracements of 38.2% to 50% of the total range from the May high down to the July low. A protective stop should not be much looser than below the low of the multi-week trading range.

In addition to the $SOX, both the Nasdaq Composite and Nasdaq 100 indices closed above their 50-day moving averages for the first time since May 9. Like IGW, the Nasdaq 100 Index Tracking Stock (QQQQ) also finished above both its 50-day MA and its August 4 high:

The QQQQ and IGW daily chart patterns are similar, so both ETFs present a decent risk-reward ratio. But because recent strength has been largely focused in the tech arena, we would probably favor buying IGW, or any of the other semiconductor ETFs, over QQQQ. It’s not a bad play to test the water on these ETFs, but don’t forget that they are well off their 52-week highs. As such, there is a lot of overhead supply that will result in traders and investors selling into strength. If you buy a new position and it acts well, go ahead and add a few shares, but don’t get greedy on the upside profit potential. Other sectors and market indices have not confirmed the recent Nasdaq strength and could easily weigh down the tech stocks, so it’s best to test the water with one foot before jumping in head first.

Today’s Watchlist:

IYR – iShares DJ Real Estate Index
Short

Trigger = below 73.44 (below yesterday’s low)
Target = 69.30 (support of 200-day MA)
Stop = 74.77 (above yesterday’s high)
Shares = 400

Notes = Per the commentary and explanation in the August 15 issue of The Wagner Daily, we are targeting the REIT sector for short entry. If you receive a “shares not available” message from your brokerage firm on the short sale attempt, we recommend calling your broker and asking them to “locate” shares of IYR for selling short. Most brokers will be happy to do this and can usually find shares to borrow. If not, consider switching to a broker with a large list of stocks for shorting.

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 = + $108

IWM short (250 shares from August 1 entry) –
sold short 68.65, stop 70.80, target 61.70, unrealized points = (0.77), unrealized P/L = ($193)

SDS long (300 shares from August 8 entry) –
bought 70.73, stop 68.60, target 75.30, unrealized points = (1.83), unrealized P/L = ($549)

Closed positions (since last report):

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

$56,735

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