The Wagner Daily | October 11, 2006

Commentary:

The major indices oscillated around both sides of the flat line yesterday before finishing the choppy session with marginal gains. Both the S&P 500 and Nasdaq Composite edged 0.2% higher, while the Dow Jones Industrial Average managed a 0.1% gain. The S&P Midcap 400 showed a bit of relative strength by rallying 0.4%, but the small-cap Russell 2000 only kept pace with the Nasdaq by advancing 0.2%. Each of the major indices closed in the upper third of their intraday ranges, and at or fractionally above their respective highs of the previous day.

Total volume in the NYSE surged 19%, while volume in the Nasdaq was 18% above the previous day’s level. The gains on higher volume technically gave the broad market another bullish “accumulation day.” But given the choppy trading and minimal gains, the session was more indicative of churning. This occurs when turnover rises significantly in both exchanges, but the percentage gains in the S&P and Nasdaq are flat to minimal. When this occurs after an extended rally, it is often indicative of institutional selling into strength. Market internals were positive by a narrow margin. In the NYSE, advancing volume exceeded declining volume by a ratio of just over 3 to 2. The Nasdaq was positive by only 1.3 to 1.

Though the broad market has made little headway over the past three days, it is bullish that leading stocks have been holding their recent breakouts, while the major indices are holding at their highs in a tight, sideways range. Overall, both price action and broad volume patterns have been healthy and have flashed no significant warning signs to the bulls. In the intermediate-term, odds for profitability continue to favor the long side of the market, as there are a minimal number of quality trade setups on the short side. However, there are two reasons we feel that prudent traders should approach the market with an ounce of caution in the short-term.

With the Dow consolidating at its all-time high and the S&P at more than a five-year high, there is obviously a lack of overhead supply to weigh on those indices. However, one technical aspect that may result in at least a temporary broad market correction is resistance of the upper trend channels on the daily charts of all the major indices. Since forming a bottom nearly three months ago, the broad market has been steadily trending higher. This has resulted in the formation of clearly defined trend channels that can help you anticipate near-term support and resistance levels. Looking at the daily charts of the S&P and Nasdaq below, notice how both indices are sitting near the top of their respective uptrend channels (moving averages removed so you can more easily see the trend channels):

As technical traders, we must assume that steadily trending stocks, indexes, and ETFs will maintain those established trends until they prove otherwise. As such, it’s logical to anticipate a correction off the highs of the upper trend channels. This, of course, does not mean we feel the solid uptrends in the broad market are in danger of being broken. Rather, we are simply suggesting the likelihood of at least a short-term correction down to support of the bottom of the uptrend channels.

The second reason we are advising a cautious near-term stance is the return of good ol’ quarterly earnings season. As mentioned in yesterday’s newsletter, keystone companies have begun to report their earnings results of the past quarter, and will continue to do so over the next several weeks. If you have been trading for more than a few months, you are most certainly aware of the erratic and volatile price action that often results from the release of closely watched earnings reports from major players in a variety of industry sectors. Earnings season is infamous for causing solid chart patterns to completely invalidate themselves. Unfortunately, technicals often go out the window immediately after a company reports earnings. One or two negative earnings reports from benchmark companies could easily cause the major indices to rapidly fall to the lower channel of the uptrends or more.

If you’re currently holding long positions that are showing a profit, there is no reason to ditch them without cause. Even though the major indices are already pushing the top of their trend channels, they could continue to grind higher for days without a retracement. You might consider, however, either reducing your share size or at least trailing your stops tighter. Consider using intraday trend lines on the 15-minute chart interval for maximum profitability. If you’re sitting mostly in cash now, this is where patience and discipline is required. There will be a lot of nice buy setups if the market corrects down to support and holds, but your risk/reward ratio of entering new positions at current levels is negatively skewed. Be on the lookout for those earnings land mines in the coming weeks and remember to always trade what you see, not what you think!

Today’s Watchlist:

There are no new setups for today. Per the commentary above, we are waiting for at least a small correction in the market before entering any new long positions. As for shorts, we simply don’t see many new setups out there. As always, we will send an intraday e-mail alert if/when we enter any new positions intraday.

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):

stop 184.65

unrealized P/L = + $705

SMH short (500 shares from September 18 entry) –
sold short 34.84, stop 34.67, target 32.15, unrealized points = + 0.66 unrealized P/L = + $330

UTH short (300 shares from September 28 entry) –
sold short 124.62, stop 125.78, target 119.70, unrealized points = + 0.10 unrealized P/L = + $30

Closed positions (since last report):

net P/L = + $406

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

$82,773

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