The Wagner Daily | September 20, 2006

Commentary:

Roller coaster type day in the markets as the major averages experienced major intraday swings in either direction on the release of various economic and corporate data. Let’s start at the beginning. Stirring up premarket futures action at 8:30am EST, was the release of PPI and Core PPI figures which both came in relatively benign, indicating a lack of inflation which the market digested with a very small gap up in the SPY, DIA and QQQQ. The morning trade was lackluster until about 11:30am EST (ironically, what should have been the start of the midday doldrums) when search behemoth Yahoo! (YHOO) reported that “profits and sales this quarter will be at the low end of its forecast because of slower advertising demand in some industries.” That, coupled with news coming in from Asia about the military coup in Thailand caused the markets to sell off quite hard taking not only the $GIN (Goldman Sachs Internet Index) but other tech sectors and the broad market noticeably lower. The weakness continued en masse until 1:30pm when the market suddenly realized that crude oil was about to close on the NYMEX a full $2.00 per barrel lower than yesterday’s close and lower than the prior swing lows of $62.80 set on Friday. Although the ensuing afternoon advance was not completely broad-based as the internets and semis remained relatively weak, it was enough to bring the markets back relatively close to their opening positions thus causing only minor damage to their closing numbers. The Dow ended up off by 14.09 (-0.12%), the S&P lost 2.87 (-0.22%), and the Nasdaq Composite being the weakest, shed 13.38 (-0.60%).

Total volume in the NYSE was approximately flat, coming in very close to Monday’s levels, while there was a small increase in total turnover on the Nasdaq on the heels of the strong panic selling in the internets. Overall volume on the Nasdaq increased by 8%. Even with the afternoon rally, market internals were not able to close positive with NYSE breadth (relationship between advancing volume to declining volume) closing 1.8 to 1 negative, and 2.6 to 1 negative on the Nasdaq. Advance decline lines told a similar story with declining stocks edging out advancers by a margin of 443 on the NYSE at the close and almost 700 on the Nasdaq.

One interesting point to mention when looking at intraday action yesterday is the way that bad news seems to hit markets right when they are at technical pivots. Is it the technicals, or is it the news that moves markets? The answer is both, of course. However, because the market is a discounting mechanism, it seems to “know” news in advance and acts accordingly. Lets look at an hourly chart of the SPY below to illustrate this interesting phenomena.

In the 60 minute snapshot of the last few trading days in SPY above, note how the 131.65 area was tested four times in three trading days after the sharp rally of last week. As annotated by the red circled areas, you can clearly see how that area was support each and every time that it was tested. The main thing to note in this picture is the sheer number of times that the support level was approached. It is quite rare in terms of technical phenomena to be able to test a support level more than 3 times and not break it. This is due to the simple fact that those on the “other side” of the trade are eventually washed out leaving only those in the attacking camp. After such a huge run of last week, coupled with the triple top which you can see at the peaks in the photo above, it was imminent that the bears would win out on a fifth test of that support level. Interesting how the YHOO news seemed to come at just the “right” time. Although this event was by no means earth shattering, and certainly was more of a knee-jerk reaction than a major shift acting as the catalyst for a major downswing, its still an excellent educational example of how technicals often lead news and are more often than not inextricably joined at the hip. The most rewarding setups are very often where the technical and the fundamental come together at the same time.

As we reported yesterday, the Fed will once again meet to discuss interest rates today at 2:15pm EST. As the recently released CPI and PPI figures are painting inflation as being currently tame, we expect no change in the actual rate. However, as usual, the language that the Fed uses after the fact to justify their decision and set the stage for further meetings, will be foremost on everyone’s mind. As of this writing, ORCL just released results that seem to be pleasing to the Street. An 800 lb. gorilla in the broker-dealer family, Morgan Stanley and also big box retailer, Circuit City, will both release quarterly results this morning before the open. These three corporate events along with a majority of traders trying to stay on the sidelines ahead of the Fed should be the fodder for an interesting day. As always, trade only what you see, never what you think.

Today’s Watchlist:

There are no new setups for today, as we are near our maximum buying power based on the $50,000 model account size.

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 = + $780

XHB long (350 shares from September 13 entry) –
bought 32.85, stop 30.71, target 37.60, unrealized points = + 0.25, unrealized P/L = + $88

SMH short (500 shares from September 18 entry) –
sold short 34.84, stop 36.12, target 32.15, unrealized points = + 0.84, unrealized P/L = + $420

IWM short (400 shares from September 12 entry) –
sold short 71.41, stop 73.12, target 67.10, unrealized points = (.84), unrealized P/L = ($336)

Closed positions (since last report):

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

$91,175

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