The Wagner Daily | September 26, 2006

Commentary:

Stocks immediately sold off after gapping up yesterday morning, but the buyers took control about an hour later, triggering a broad-based reversal. By mid-day, the major indices had rallied above their opening highs, then continued to trend higher throughout the afternoon. The Nasdaq Composite led the charge by advancing 1.4%, while the small-cap Russell 2000 followed closely behind with a 1.2% gain. The S&P Midcap 400 gained 1.0%, the S&P 500 0.9%, and the Dow Jones Industrial Average 0.6%. The S&P 500 marginally finished at a new multi-year closing high, but below last week’s intraday highs.

Confirming yesterday’s strength was a solid rise in turnover across the board. In the NYSE, total volume surged 22% higher, while volume in the Nasdaq was 12% above the previous day’s level. The broad-based gains on higher volume gave bullish “accumulation days” to both the S&P and Nasdaq, a sign that institutions were behind the buying. Market internals were firmly positive as well. In the Nasdaq, advancing volume exceeded declining volume by nearly 5 to 1. The NYSE ratio was positive by just over 2 to 1.

Financials are one industry sector that has been showing good relative strength over the past several weeks. Within that sector, we found the Regional Bank HOLDR (RKH) to be among the best performing ETFs as well. Its 0.6% advance yesterday enabled RKH to finish not only at a new 52-week high, but at a fresh all-time high as well. The weekly chart of RKH is now showing a breakout of a bullish “cup and handle” chart pattern. Its rally above the August high of 155.95 corresponds to a breakout above the high of the “handle” and represents an entry point on the long side. We like RKH for long entry, just as long as the S&P holds up okay. Below is a weekly chart of RKH:

As mentioned in several newsletters over the past week, the main focal point on traders’ minds continues to be the pivotal 52-week high in the S&P 500. On September 20, the S&P probed above its prior 52-week high on an intraday basis, but closed just below it. The index slid 0.8% in the successive two days that followed, pointing to a potential failed breakout at its high. But yesterday’s rally pushed the S&P back up to test its high at the 1,326 to 1,328 area, indicating quite a bit of indecision over the past week:

Unfortunately, we are now looking at a situation in which neither the breakout to a new multi-year high nor the failed breakout we anticipated have confirmed themselves. In order to confirm an upside breakout, we need to see the S&P close above its high by more than a fraction of a point. The index also needs to convincingly rally above last week’s intraday highs, as they represent a bit of overhead supply.

Conversely, the bearish “head and shoulders” chart pattern we illustrated in yesterday’s Wagner Daily technically remains valid. While we admittedly did not expect the S&P 500 to rally all the way back to test last week’s highs (the “head”), we can not say the “head and shoulders” pattern has failed until the index closes above the top of the head. Granted, this could easily happen today, but no need to jump the gun and cover any short position in the S&P 500 until you are proven wrong. When setting stops, we prefer to take the stress-free attitude of “set it and forget it.” This means we simply stick to our predetermined stop price at all times, rather than spontaneously reacting to the market’s day to day gyrations. This is especially important when price action becomes indecisive and choppy.

Our short position in the S&P Select Utilities SPDR (XLU) hit its trailing stop yesterday, but we locked in a decent gain in the process. Although we only netted a 2.1% gain on the trade, we were positioned with approximately double our average share size due to the low volatility of XLU. This enabled us to net an average capital gain on the trade. The number of shares we suggest to subscribers is always designed to provide both consistent risk and profit potential for each and every trade, regardless of whether an ETF trades with an average intraday range of 20 cents or 2 dollars. Failing to adjust your share size to account for the different volatility of each ETF is a sure way to take too much risk on the volatile positions and not enough risk on the slow movers. Open positions currently showing an unrealized gain are the StreetTRACKS Homebuilders (XHB) long and the Semiconductor HOLDR (SMH) short. The UltraShort S&P 500 ProShares (SDS) is in the red, but i
s still above our stop price.

Today’s Watchlist:

There are no new setups for today, but 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 = + $310

XHB long (350 shares from September 13 entry) –
bought 32.85, stop 30.71, target 37.60, unrealized points = + 0.78, unrealized P/L = + $273

SDS long (500 shares from September 21 entry) –
bought 66.16, stop 64.85, target 70.15, unrealized points = (0.40), unrealized P/L = ($200)

Closed positions (since last report):

net P/L = + $720

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

$61,761

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