The Wagner Daily | September 7, 2006

Commentary:

The broad market corrected from its recent gains yesterday, as stocks sold off sharply across the board. The major indices gapped down on the open, then trended lower throughout the session. The Nasdaq Composite fell 1.7%, the S&P 500 lost 1.0%, and the Dow Jones Industrial Average declined 0.6%. As we often see on “down” days in the market, the small-cap Russell 2000 showed the most relative weakness by closing 2.1% lower. The S&P Midcap 400 Index declined 1.7%. Each of the indices finished near their intraday lows, pointing to potential downward momentum into today’s open.

Total volume in the NYSE rose by 8%, while volume in the Nasdaq was 3% higher than the previous day’s level. The broad-based losses on higher volume caused bearish “distribution days” to register for both the S&P 500 and Nasdaq Composite. However, the increase in volume was not too significant, especially considering the large percentage losses in the market. On August 31, the major indices technically sustained a “distribution day,” despite minimal price losses. As you may recall, we classified that session as bearish “churning” action. Other than that session, August 9 was the last time both exchanges sold off on higher volume. Firmly negative market internals confirmed yesterday’s bearish price action. In the NYSE, declining volume exceeded advancing volume by a margin of 5 to 1. The Nasdaq ratio was negative by nearly 7 to 1.

In the August 31 issue of The Wagner Daily, we pointed out the bearish pattern that was developing in the S&P Select Energy SPDR (XLE), which is largely tied to the movement of oil stocks. As you might recall, we liked the break of the 50-day moving average that also corresponded to a breakdown below support of its two-month uptrend line. After breaking this dual area of support, XLE bounced higher on September 1 and 5, but the 50-day moving average acted perfectly as resistance that triggered a large selloff yesterday. This is a great educational example of the most basic tenet of technical analysis — prior support becomes the new resistance after the support is broken. We have illustrated this on the daily chart of XLE below:

Yesterday’s pattern in XLE was rather bearish, as it gapped open near the bottom of the previous session’s “up” day, then sold off sharply to close below the lows of the prior three days. Because it finished beneath the August 31 low, odds are pretty good that we will now see further downside. Support of the 200-day moving average below may provide an excuse for another short-term bounce, but an eventual re-test of the June low is feasible. Though not an “official” play, we remain short XLE in the Morpheus Capital hedge fund from a price of 56.48. Since it broke support of the August 31 low, we are now trailing our stop lower, to near break-even and just above the September 6 high.

The loss in the S&P 500 yesterday caused the index to close right at support of its eight-week uptrend line:

As with all trendlines, we must assume that the current uptrend in the S&P will remain intact until the index proves otherwise. An intraday probe below support is highly likely, but the important point is whether or not it closes below the trendline. Even a one-day close below the trendline would not confirm the break of support, but it would clearly serve as a warning sign to the bulls. Now is the time to tighten your stops on all long positions and begin making a new watchlist of short setups. If the S&P breaks its uptrend line, the first bounce that occurs after the trendline break would provide the ideal entry point on the short side. Waiting for that retracement into resistance is much safer than selling short the actual breakdown. The XLE chart above is a clear example of this.

Today’s Watchlist:

There are no new setups in the pre-market today. As always, we will send an intraday e-mail alert if/when we enter anything new.

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 = + $170

GLD long (300 shares from September 5 entry) –
bought 63.42, stop 60.72, target 66.55, unrealized points = (0.56), unrealized P/L = ($168)

IYR short (400 shares from August 23 entry) –
sold short 74.52, stop 76.54, target 69.80, unrealized points = (1.4), unrealized P/L = ($560)

Closed positions (since last report):

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

$83,526

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