The Wagner Daily | September 14, 2006

Commentary:

Stocks posted their fourth consecutive day of gains yesterday, enabling the Nasdaq Composite to close above its 200-day moving average for the first time in four months. Both the S&P 500 and Dow Jones Industrial Average gained 0.4%, while the Nasdaq advanced 0.5%. Small and mid-cap stocks showed the most relative strength, a confirming indicator of the broad market’s newfound strength. The Russell 2000 and S&P Midcap 400 indices each rallied 0.9%.

Total volume in the NYSE declined by 7%, while volume in the Nasdaq was 6% lighter than the previous day’s level. Obviously, it is always better when higher volume coincides with a session of broad-based gains, but turnover remained healthy nevertheless. The NYSE volume level has exceeded its 50-day average in each of the past three sessions, certainly a welcome change from the August doldrums. More importantly, solid gains in the S&P coincided with each of those three days. Market internals remained strong as well. Advancing volume in the NYSE exceeded declining volume by a margin of 2 to 1, while the Nasdaq ratio was slightly better at 5 to 2. Institutional traders have clearly been scooping up shares of stock over the past several days, despite a weak start to the month of September.

The recent strength in the U.S. markets has generated buying interest in a handful of the international markets as well. As such, now is a good time to review the chart patterns of the plethora of international ETFs found on the free Morpheus ETF Roundup. The iShares Xinhua China 25 (FXI) is arguably the international ETF with the most relative strength. This ETF, which tracks mainland China’s equivalent of the Dow Jones Industrial Average, has been oscillating in the $76 to $80 range for the past several months, but appears it may soon break out. Looking at the chart below, notice how the 50-day moving average has risen up to provide support at the $78 area. If FXI rallies above its September 5 high, it will break the one-month downtrend. Beyond that, its all-time high is not much further above:

On September 7, the S&P 500, along with several other broad-based indices, fell below support of their primary uptrend lines from the lows of July. When that occurred, we suggested that market sentiment may be changing and traders should consider initiating new short positions into subsequent strength. However, recall we also explained that “all bets are off” on the short side of the market if the S&P rallies back above new resistance of its prior uptrend line. As you might have guessed, that is exactly what has happened over the past few days. As you can see, the S&P 500 spent only three days below resistance of its prior uptrend line before surging back above it:

Not only did the S&P rally back above its primary uptrend line, but it also closed above its prior “swing high” from September 5. Both the Nasdaq and Dow have similar bullish chart patterns. Because the major indices recovered from last week’s weakness in such a convincing way, we feel that overall odds no longer favor the short side of the market (at least in the short-term). Further, the S&P 500 is now less than one percent below its 52-week high, although the Nasdaq Composite is still well below its high.

As subscribers are aware, we initiated a new short position in the iShares Russell 2000 (IWM) on September 12. In hindsight, the trade has not been working out too well, but hindsight is always 20/20. At the time of entry, we had several valid reasons for doing so. For starters, the S&P was rallying into resistance of its prior uptrend line, which normally provides a very positive risk/reward ratio for new short positions in general. More specific to the IWM setup is that it was forming the right shoulder of a bearish “head and shoulders” chart pattern and was doing so as it rallied into resistance of its 200-day moving average. All these combined factors gave us logical cause to assume the short sale in IWM would work in our favor. But, as we are occasionally reminded, the market does not always work in a logical fashion. That’s why we rely on protective stop loss orders with every single trade. Since IWM has not yet hit our stop price, all we can do at this point is simply let the trade work itself out in one direction or the other. We also bought the StreetTRACKS Homebuilders (XHB) yesterday, and remain short the S&P Select Utilities SPDR (XLU). So far, the XLU trade is working well and showing a solid unrealized gain.

Today’s Watchlist:

There are no new setups for today.

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 = + $350

XHB long (350 shares from September 13 entry) –
bought 32.85, stop 30.71, target 37.60, unrealized points = + 0.00, unrealized P/L = + $0

IWM short (400 shares from September 12 entry) –
sold short 71.41, stop 73.12, target 67.10, unrealized points = (1.34), unrealized P/L = ($536)

Closed positions (since last report):

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

Notes:

Per intraday e-mail alert, we changed the XHB trigger price to buy at market at 10:03 am.