The Wagner Daily | September 5, 2006

Commentary:

The stock market concluded a bullish week with a session of solid gains ahead of the holiday weekend. The S&P 500 gained 0.6%, the Nasdaq Composite advanced 0.4%, and the Dow Jones Industrial Average rallied 0.7%. A one percent correction in the Semiconductor Index ($SOX) was responsible for the slight relative weakness in the Nasdaq. The small-cap Russell 2000 lagged even more by gaining only 0.1%. The S&P Midcap 400 closed 0.5% higher. Despite the light turnover, it was a solid week for the major indices. The Nasdaq Composite led the way with a 2.5% gain, while the S&P 500 and Dow Jones Industrials tacked on 1.2% and 1.6% respectively.

As one might expect, volume receded from its already lighter than average levels ahead of the three-day Labor Day weekend. Total volume in the NYSE declined by 14%, while volume in the Nasdaq was 22% lower than the previous day. Since August 4, there has only been one day in which volume in the NYSE exceeded its 50-day average level. Such an extended period of light turnover is typical during the summer doldrums, but the good news is that we should begin to see volume levels return to normal as traders return from their vacations and institutions begin stepping back into the markets. On a percentage basis, stocks had an impressive performance in the month of August, but experience has taught us to be leery of gains that are made during lengthy periods of below average volume. Throughout the next one to two weeks, it should become clear whether or not last month’s gains will be sustainable.

In our last newsletter, we pointed out the bullish setups that were shaping up in both the iShares Silver Trust (SLV) and the StreetTRACKS Gold Trust (GLD). Because of its relative strength, we mentioned that SLV was the better choice of the two, but overnight strength in the spot gold futures is hinting that the price of gold is now poised to gap and catch up to the price of silver. We remain long a small position of SLV, which was e-mailed to subscribers as an “unofficial” entry last Thursday, but we are now considering buying GLD as well. Of particular interest is the daily chart pattern, which is coiled like a spring, ready to break out of its recent volatility contraction. The longer a stock or ETF settles into a tight, sideways range, the more explosive the move will eventually be when it breaks out above or below that range. When key moving averages happen to converge with that narrow price band, it fuels the subsequent volatility expansion even more. GLD has both its 20 and 50-day moving averages converging at its current price. Further, in the case of an intermediate-term volatility contraction, the direction of the eventual breakout will usually be the same as the direction of its long-term primary trend. In the case of GLD, the weekly chart clearly shows an uptrend. For all these reasons, we like the idea of buying GLD on a breakout above its multi-month downtrend line, which would also correspond to a breakout above its sideways range. This is illustrated on the daily chart of GLD below:

The S&P 500 has retraced nearly all of its loss from the May to June selloff and is only 1.1% below its 52-week high, but the Nasdaq Composite has recovered only half of its corresponding loss and remains 7.5% off its high. Strength in the tech sectors has enabled the Nasdaq to show relative strength to the other indices over the past several weeks, but the “big picture” of intermediate and long-term Nasdaq weakness has not changed. Looking at the chart below, notice how the Nasdaq finished last week just above resistance of its prior high from July 3, but not enough to confirm a breakout above that level. We have also applied Fibonacci retracement lines to illustrate how the index has recovered only 50% of its loss from the April high down to the July low:

Going into the new week, keep a watchful eye on that 2,190 to 2,195 resistance level because it could provide a convenient excuse for traders to sell Nasdaq shares into strength. If that occurs, it will obviously be difficult for the other indices to advance as well. Even if the Nasdaq manages to close firmly above its prior high of 2,190, resistance of the 200-day moving average (not shown on the chart above) awaits at the 2,224 area. When the $SOX index began to break out, we said that buying the breakout would probably work, but we suggested selling into strength of a short-term move. If you have not already done so, now would be a good time to tighten your protective stops on any long positions.

Today’s Watchlist:

GLD – StreetTRACKS Gold Trust
Long

Trigger = above 62.78 (above the two-day high)
Target = 66.55 (test of July 14 high)
Stop = 60.72 (below the low of August 1)
Shares = 300

Notes = See commentary above for 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 = ($460)

MZZ long (250 shares from August 23 entry) –
bought 73.03 (avg.), stop 70.18, target 77.20, unrealized points = (2.35), unrealized P/L = ($588)

Closed positions (since last report):

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

$47,938

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