The Wagner Daily | August 18, 2006

Commentary:

After rising throughout the morning session, stocks fell from their highs yesterday afternoon, but the major indices still notched their fourth consecutive day of gains. The Nasdaq again led the way with a 0.4% gain, while the S&P 500 and Dow Jones Industrial Average closed higher by 0.2% and 0.1% respectively. The small-cap Russell 2000 advanced 0.5%, but the S&P Midcap 400 Index was unchanged. Each of the broad-based indices briefly dipped into negative territory around 2:30 pm EDT, but recovered off their lows to close near the middle of their intraday ranges. Although we planned to hold our winning position in the Pharmaceutical HOLDR (PPH) longer, we made a judgment call to sell it for a 1% gain yesterday due to negative news that caused Merck (MRK) to plummet 6%. Presently, MRK has an 11% weighting in PPH, so the ETF will have a difficult time going much higher with such pressure on that stock.

The broad market managed two straight days of higher volume gains on Tuesday and Wednesday, but turnover declined across the board yesterday. Total volume in the Nasdaq dropped off by 8%, while volume in the NYSE was 1% lighter than the previous day’s level. Since stocks sold off from their highs in the afternoon, it is actually positive that volume dried up a bit rather than expanded. Market internals were marginally positive in both exchanges. Despite the recent gains in the S&P 500, volume in the NYSE has registered above its 50-day average level only one time in the past nine sessions, confirming that we remain in the midst of the summer doldrums.

Two weeks ago, we pointed out that the StreetTRACKS Gold Trust (GLD), which mirrors the price of the spot gold commodity, had run into resistance of its three-month downtrend line and was poised for a big move in either direction. At the time, a few technical factors caused us to think GLD would break out above that downtrend line and surge higher, but that has not happened. Instead, its downtrend line has remained intact, forcing gold to drift lower. Until yesterday, selling short GLD was a bit too risky, but it closed below key support of both its 50-day moving average and its two-month uptrend line. Looking at the daily chart below, notice how its primary downtrend (the descending red line) remains in effect, and support (the ascending dashed blue line) has been broken as well:

We remain bullish on the long-term prospects of gold, but it appears short and intermediate-term momentum has shifted to the downside. As such, subscribers will see below we are stalking GLD for a potential short sale entry today. As recently detailed, the iShares DJ Real Estate Index (IYR) also remains on our short sale watchlist.

Today is monthly options expiration day, so be on guard for potential volatility and odd moves in the late afternoon. Most of the time, we avoid entering new positions in the latter half of the day on options expiration days, which occur on the third Friday of each month. This is because many of the moves tend to be falsely exaggerated, as institutions attempt to move stocks closer to the strike prices that will cause the most damage to the most traders. Therefore, today may be good for simply entering your stops on existing positions and shutting down early in the afternoon.

Today’s Watchlist:

GLD – StreetTRACKS Gold Trust
Short

Trigger = below 60.84 (below the Aug. 17 low)
Target = 55.20 (test of support of the June low)
Stop = 63.70 (above resistance of the downtrend line)
Shares = 250

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

IYR – iShares DJ Real Estate Index
Short

Trigger = below 73.64 (below the Aug. 17 low)
Target = 69.30 (support of 200-day MA)
Stop = 75.27 (above the Aug. 17 high)
Shares = 400

Notes = This setup did not trigger yet, but we still like it for potential short entry today. Trigger and stop prices remain the same. 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 = ($475)

Closed positions (since last report):

net P/L = + $200

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

$36,432

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