The Wagner Daily | November 2, 2006

Commentary:

After two days of indecision and mostly unchanged prices, the major indices followed through on the broad-based correction that began on October 27. The Nasdaq Composite plummeted 1.4%, the S&P 500 lost 0.7%, and the Dow Jones Industrial Average declined 0.4%. The S&P Midcap 400 fell 1.2%, while the small-cap Russell 2000 suffered a 1.9% loss. After trending steadily lower throughout the entire session, each of the indices also closed near their intraday lows.

Overall volume rose in both exchanges yesterday, causing both the S&P and Nasdaq to register bearish “distribution days.” Both the NYSE and Nasdaq saw 3% volume increases over the previous day’s levels. In the Nasdaq, it was the fourth day of higher volume losses within the past month and the third such “distribution day” in the S&P during the same period. As you may recall, we labeled the October 31 price to volume action as bearish “churning” and suggested it was a warning sign to the bulls. Therefore, it was not a big shock that yesterday was a “distribution day” in both exchanges. Market internals were pretty ugly yesterday. The Nasdaq advancing volume to declining volume ratio was negative by a margin of nearly 5 to 1. In the NYSE, declining volume exceeded advancing volume by approximately 7 to 2.

The StreetTRACKS Gold Trust (GLD) bucked the trend of the broad market by zooming 2% higher yesterday. More importantly, the rally confirmed its recent breakout above several key resistance levels:

Looking at the chart above, notice how GLD has closed firmly above resistance of its prior downtrend line that had been in place for five months (the descending purple line). The breakout also coincided with a move above both its 200-day moving average (the orange line) and prior high from September 28. In the October 25 issue of The Wagner Daily, we illustrated how GLD was forming a bullish chart pattern known as an inverse “head and shoulders.” We subsequently bought a half position of GLD in that day’s session, then added to it on October 30. So far, GLD is showing an unrealized gain of two points (3.6%) and should continue to move higher in the intermediate-term. With both an inverse and a regular “head and shoulders” pattern, the predicted price target is equal to the distance from the top of the “head” to the “neckline.” In this case, the top of the “head” is 55.55 and the “neckline” is right around 60 (the dashed blue line). Therefore, a realistic upside price target is the 64.50 area (4.5 points above the neckline at 60). In the short-term, GLD may correct a bit lower, but all the prior resistance levels it just broke out above should now act as the new support levels.

The Semiconductor Index ($SOX), which has been in a choppy, sideways range for the past several days, resolved itself to the downside yesterday. We sold short the Semiconductor HOLDR (SMH) on October 27 after it began to come back down from a “lower high” that had formed below resistance of the 200-day moving average. Yesterday, SMH closed right at the intraday low of October 27 and closed only two cents above a major level of horizontal price support:

Any further weakness in the $SOX today should cause SMH to fall below the horizontal support illustrated above. If that happens, it will undoubtedly weigh on the Nasdaq, and hence the entire broad market. We are prepared to capitalize on such a move with our SMH short position that is presently showing a 1.9% gain.

Yesterday morning, we mentioned that the major indices could no longer be labeled “overbought,” but that further downside could easily still occur. Yesterday’s losses pulled the S&P back down to support of its 20-day moving average, while the Nasdaq Composite closed just below it. Since the current uptrend began back in July, the 20-day moving average has perfectly acted as support from which the major indices subsequently continued their primary uptrends. As such, we will be closely monitoring the price action and volume patterns of the market over the next several days in order to determine if this will be the case once again.

Looking purely at the daily charts, one could easily surmise that the current correction down to the 20-day moving averages in the S&P and Nasdaq is no different than others over the past several months. But there is one crucial, yet easily overlooked difference this time — poor performance of leading stocks. In a healthy market, leading growth stocks will show relative strength by retracing a smaller percentage than the broad market on the down days. However, since the correction began on October 27, we have seen many leading stocks such as Hittite Microwave (HITT) and Garmin (GRMN) completely fall apart. Further, there have been many failed breakouts to new highs as well. Clearly, these are not good signs, so we are against buying new long positions right now until this scenario changes. Remember, though, that commodity and currency ETFs are not directly tied to the stock market’s performance.

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):

target 64.45

unrealized P/L = + $864

SMH short (500 shares from October 27 entry) –
sold short 33.91, stop 35.06, target 30.60, unrealized points = + 0.63, unrealized P/L = + $315

OIH long (150 shares from October 19 entry) –
bought 131.65, stop 130.30, target 142.30, unrealized points = + 0.08, unrealized P/L = + $12

Closed positions (since last report):

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

$60,944

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