The Wagner Daily | October 31, 2006

Commentary:

The Nasdaq recovered half of its previous day’s loss yesterday, but both the S&P and Dow finished near unchanged levels. Overall intraday price action was a bit indecisive, as stocks gapped down on the open, trended reversed higher into mid-day, but fell from their highs in the final ninety minutes of trading. The Nasdaq Composite and small-cap Russell 2000 indices each rallied 0.6%, but both the S&P 500 and Dow Jones Industrial Average were flat. The S&P Midcap 400 gained 0.2%. The S&P and Dow showed a bit of relative weakness by closing near the middle of their intraday ranges, but the Nasdaq finished in the upper third of its range.

Although lighter volume in last Friday’s selloff enabled the major indices to dodge a bearish “distribution day,” a second straight day of declining turnover prevented the Nasdaq from registering a bullish “accumulation day” yesterday. Total volume in the Nasdaq was 21% lighter than the previous day’s level, while volume in the NYSE saw a more tepid decline of only 8%. Matching the divergent price action, market internals in the NYSE were nearly flat, but advancing volume in the Nasdaq exceeded declining volume by a margin of more than 3 to 1.

After scanning extensively for new quality ETF setup patterns last night, we were nearly left with an empty list. Most ETFs remain extended way above key support levels, making them risky buys right now. If these strong ETFs continue their correction that started last Friday, we will soon see buying opportunities, but we can’t be certain that stocks will correct much further in the short-term. We feel we are already positioned in the best setups, as we are presently long the StreetTRACKS Gold Trust (GLD) and the Oil Service HOLDR (OIH), both of which are forming bottoms and forming reversal patterns. On the short side, we have the Semiconductor HOLDR (SMH), one of the only ETFs that is well below its 52-week high and therefore has a lot of overhead resistance. But after scanning every nook and cranny for something fresh, we noticed that many of the Currency ETFs are trying to break out. This relatively new type of ETF enables you to capture moves in the currency markets with the same simplicity of trading a stock. Below is a list of these ETFs that currently exist:

Currency ETFs

Euro Currency Shares (FXE)
British Pound Sterling Trust (FXB)
Canadian Dollar Trust (FXC)
Australian Dollar Trust (FXA)
Swiss Franc Trust (FXF)
Swedish Krona Trust (FXS)
Mexican Peso Trust (FXM)

Recent weakness in the U.S. dollar has enabled many of the above ETFs to show signs of life. The Australian Dollar Trust (FXA), for example, just broke out above resistance to a new high. Take a look at the weekly chart:

You will notice that FXA, along with most of these ETFs, does not trade a lot of volume on an average day. But unless you are a daytrader, this really doesn’t matter. Remember that all ETFs are synthetic instruments that move up and down in correct correlation to the price of the underlying instrument, which in this case is the currency market. Unlike stocks, ETFs are not traded in an auction system of supply and demand, so liquidity is never an issue. The only thing to be aware of is the occasional wide spread, but this can be countered through the use of limit orders.

As for the broad market, it seems to be in a short-term transition right now. Stocks corrected firmly last Friday, but did so on lighter volume, which is bullish. However, yesterday’s bounce in the Nasdaq occurred on even lower volume, which means the buyers may be drying up too. It may be a bit challenging to “scare up the profits” on either side of the market today, so we are continuing to tread lightly and maintaining a cautiously neutral stance overall.

Today’s Watchlist:

There are no new setups today. As always, we will send an intraday e-mail alert if/when we enter any new positions.

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 57.40

unrealized P/L = + $280

OIH long (150 shares from October 19 entry) –
bought 131.65, stop 130.30, target 142.30, unrealized points = + 1.05, unrealized P/L = + $158

SMH short (500 shares from October 27 entry) –
sold short 33.91, stop 35.06, target 30.60, unrealized points = + 0.14, unrealized P/L = + $70

Closed positions (since last report):

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

$60,750

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