The Wagner Daily | November 20, 2006

Commentary:

Stocks gapped down on the open last Friday morning, but recovered at mid-day to finish the day near unchanged levels. The S&P 500 eked out a 0.1% gain, but the Nasdaq Composite was lower by the same percentage. Blue chips showed the most relative strength, enabling the Dow Jones Industrial Average to advance 0.3%. The S&P Midcap 400 ticked 0.1% lower, while the small-cap Russell 2000 fell 0.3%. Although the broad market closed near the flat line, each of the major indices continued to show resiliency by bouncing back from early losses to finish at their intraday highs. Friday’s mixed session capped a strong week of broad-based gains. The Nasdaq gained 2.3%, the S&P 500 1.5%, and the Dow 1.9%. All three indices posted either record or fresh multi-year highs.

Total volume in the NYSE ticked 0.1% higher, but turnover in the Nasdaq was 15% lower than the previous day’s level. The higher volume gain in the S&P technically gave the index another bullish “accumulation day,” but both the percentage gain and uptick in volume were marginal. The drop in the Nasdaq was equally positive because the index closed with a small loss. Despite higher prices in the S&P and Dow, declining volume in the NYSE exceeded advancing volume by a margin of 1.3 to 1. The Nasdaq internals were negative by 8 to 1.

On a technical level, the most notable thing that happened last week was the breakout in the Semiconductor Index ($SOX). As noted in the November 15 issue of The Wagner Daily, the $SOX broke out to close above its 200-day moving average for the first time since May 11 of this year. Over the three subsequent days that followed, the index digested its gain by trading in a tight, sideways pattern of consolidation:

If the broad market strength is to continue, we should see follow-through of another leg up in the $SOX within the next several days. SMH, IGW, PSI, and XSD are the ticker symbols of all the ETFs that are tied to the Semiconductor sector. They have each shown similar price action since the $SOX breakout on November 14, but remember that XSD has shown the most intermediate-term relative strength. It is the only semiconductor ETF that is already trading above its October 16 high. The safest entry point to buy any of the semiconductor ETFs would be above their respective highs of the past three days.

Of the major industry sectors that are showing strength, the $SOX is one of the least extended and therefore offers the best risk/reward ratio for potential entry. However, our concern is that the strength in the $SOX may be out of sync with the broad market that has already made a very substantial move in recent weeks. The S&P 500, for example, has closed higher in 9 of the last 10 sessions. By entering any new positions at current levels, the risk is much greater because the major indices have again become extended away from their 20-day moving averages that act as solid support. If the overall market moves higher without taking a rest, the Semis will probably lead the way, but consider reducing your share size to decrease your risk. As for us, we remain in “SOH mode” (sitting on hands), managing existing positions and stalking for the next solid opportunity.

Today’s Watchlist:

There are no new trade setups for today, as we are in “SOH mode.” However, we will send an intraday e-mail alert if any outstanding setups present themselves. We’re stalking the Semiconductor ETFs for potential long entry, but it depends on whether or not the broad market corrects first.

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 = + $582

PBW long (700 shares from Nov. 15 entry) –
bought 18.11, stop 17.14, target 20.15, unrealized points = (0.16), unrealized P/L = ($112)

Closed positions (since last report):

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

$31,099

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