The Wagner Daily | October 5, 2006

Commentary:

Upward momentum from the Dow’s breakout to a new record high propelled the index firmly higher yesterday, but this time the Nasdaq, small caps, and mid caps joined the party as well. The S&P 500 gained 1.2% and the Dow Jones Industrial Average rallied 1.1%, but two of the most important indices, the Nasdaq Composite and the small-cap Russell 2000, both surged 2.1%. The S&P Midcap 400 similarly turned in an impressive 1.6% gain. The Nasdaq registered its largest percentage gain since June 29, and it also closed at its highest price since May 10. The tech-heavy index is now only 3.4% below its 52-week high. Unlike the indecisive trading sessions we have seen lately, yesterday saw stocks trend steadily higher throughout the entire session. Each of the major indices closed at their intraday highs, a sign of confidence and backing from institutional investors.

Turnover rose healthily across the board, causing both the S&P and Nasdaq to clearly notch another bullish “accumulation day.” Total volume in the NYSE increased by 10%, while volume in the Nasdaq was 12% higher than the previous day’s level. It was the second straight day of buying by mutual, pension, and hedge funds, and this time the broad market did not need to make up ground from morning losses. Market internals were also strong. In the Nasdaq, advancing volume exceeded declining volume by a margin of 4 to 1. The NYSE ratio was positive by nearly 9 to 2.

Of the 313 ETFs we presently track on a daily basis, exactly fifty of them finished at new 52-week highs yesterday. Granted, some of them are different fund families that track the same sector, but the advent of so many new highs is certainly a change from just a few weeks ago when hardly any ETFs were sitting at their highs. A plethora of exchange traded funds from the Software, Financials, Real Estate, Consumer Discretionary, and Telecom sectors all finished at fresh 52-week highs. Consult the free Morpheus ETF Roundup for a list of all the corresponding ticker symbols. Numerous international ETFs did as well. The iShares Xinhua China 25 Index (FXI) closed just a point below its high, but it finished above the high of its recent consolidation that we illustrated yesterday:

Of all the international ETFs, we feel FXI has one of the best looking chart patterns for long entry. Not only is it trading near its high, but its consolidation has been more extensive and defined than many other international ETFs. The longer a stock or ETF consolidates in a tight, sideways range, the more likely the subsequent breakout will hold up when it eventually occurs. FXI broke out above its consolidation yesterday, so we would consider taking a position into today’s close if it holds above the new support of the $82.10 level. In this case, a breakout above the consolidation is more important than waiting for the 52-week high, as there were only a few days of price resistance above the current level. Waiting a day for confirmation of a breakout before buying a new position is never a bad idea. You may pay a little bit more, but there is a much higher chance of a profitable trade by first requiring price confirmation before buying.

The most notable thing about yesterday’s action was the breadth. Every one of the more than twenty industry sectors we track finished in positive territory. Frankly, we don’t remember the last time that happened. Unfortunately for the bulls, most of the stock market’s “up” days in recent months have lacked essential leadership by the Nasdaq, Russell, and S&P Midcap indices, but yesterday’s rally was quite broad-based and each of those three indexes showed relative strength for a change. As discussed in yesterday’s newsletter, it is crucial that the Nasdaq “catches up” to the fresh 52-week highs in both the S&P and Dow. If the relative strength in the Nasdaq and Russell continues, we will feel much more confident about the prospects of continued strength in the broad market.

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.

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 = + $195

XHB long (200 shares from September 13 entry) –
bought 32.85, stop 32.27, target 37.60, unrealized points = + 0.81, unrealized P/L = + $162

BBH long (150 shares from September 28 entry) –
bought 184.15, stop 180.40, target 195.20, unrealized points = + 0.50 unrealized P/L = + $75

UTH short (300 shares from September 28 entry) –
sold short 124.62, stop 126.89, target 119.70, unrealized points = (0.05) unrealized P/L = ($15)

Closed positions (since last report):

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

$89,043

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