The Wagner Daily | April 6, 2007

Commentary:

The major indices finished the week with another session of modest gains, as volume tapered ahead of the holiday weekend. Stocks drifted upwards throughout the session before finishing near their intraday highs. The Nasdaq Composite gained 0.5%, the S&P 500 advanced 0.3%, and the Dow Jones Industrial Average closed 0.2% higher. Both the small-cap Russell 2000 and S&P Midcap 400 indices rallied 0.3%. For the week, all the major market indexes posted respectable gains. The S&P 500 added 1.6%, the Dow Jones 1.7%, and the Nasdaq 2.1%.

Not surprisingly, volume dried up as traders and investors headed out of their offices early. Total volume in both the NYSE and Nasdaq was 12% lighter than their respective levels of the previous day. Volume in both exchanges fell to the lowest levels of the year, so turnover was obviously much lighter than average as well. Market internals were solid. In the NYSE, advancing volume exceeded declining volume by a margin of just under 2 to 1. The Nasdaq ratio was positive by nearly 3 to 1.

One sector that continues to show relative weakness by lagging the broad market’s recovery off last month’s lows is Real Estate. Since forming a peak in early February, the iShares DJ Real Estate Index (IYR) has been in a downtrend. While the S&P and Dow have been steadily recovering from their March lows, IYR has only had enough strength to trade sideways instead. On April 3, IYR gapped up above resistance of its 20-day exponential moving average, but it ran into more important resistance of its intermediate-term downtrend line. Since then, it has been drifting lower along its downtrend line as the major indices have been moving higher. This is illustrated on the daily chart of IYR below:

Although it is still above its 20-day EMA, it has been stuck below its 50-day moving average since March 1. Even if IYR manages to pop above its downtrend line, it may have difficulty rallying back above its 50-day MA. Because of its relative weakness, the slightest selling pressure in the broad market next week should cause IYR to fall to test support of its prior lows. Since it has already tested that area of support three times, odds are pretty good that the next test of support will also result in a breakdown to new lows, at least to the 200-day MA. We remain short IYR since our original entry on March 13.

On the upside, watch for further gains in the StreetTRACKS Gold Trust (GLD). As we pointed out last week, a double test of support of its 50-day MA enabled GLD to break out above its consolidation on April 4. It held above the pivot on April 5 and finished near its intra-week high. Over the next few days, we expect GLD to rally to its prior high from February, just over the $68 level. We will re-assess its price action at that time to determine the likelihood of a continuation to its 52-week high from May of 2006 (around $72). We are long GLD from March 28 and will soon be trailing a stop to protect our gains. We also bought the U.S. Oil Fund (USO), another commodity ETF we recently discussed, when it reversed off its pivot last Friday. Below is a daily chart of GLD:

Since we’ve analyzed one sector we like on the short side and one on the long side, we would also like to bring your attention to one sector that is best avoided on both sides — semiconductors. The Semiconductor HOLDR (SMH), which trades in a similar fashion as the Semiconductor Index ($SOX), has been oscillating in a boring, sideways range for more than seven months. The 20, 50, and 200-day moving averages are great for predicting support and resistance levels when a stock or ETF is trending, but they are basically uselss when a stock or ETF is locked into a trading range. Because it is tied to the Nasdaq-leading $SOX index, SMH used to be one of our favorite ETFs to trade. However, profiting from momentum trades in SMH over the past seven months has been quite difficult. As such, we will continue to steer clear of SMH (and other semiconductor ETFs) until it convincingly breaks out of its choppy range in one direction or the other. The dashed horizontal lines on the weekly chart below mark the upper and lower channels of the sideways range. The blue line is the 10-week MA, which is similar to the 50-day MA:

As for the broad market, we are curious to see how stocks perform when volume returns over the next few days. We simply cannot help but be suspicious of last week’s gains that were attained without the support of institutional buying activity. The S&P 500, for example, has posted gains in each of the past six days, but only two of those sessions were on higher volume. Further, the NYSE volume was below its 50-day average level in each of those six sessions. It’s a similar situation with the Nasdaq. Each of the major indices closed last Friday above their “swing highs” from March that we focused on last week, but not by a wide margin. Stay on your toes!

Today’s Watchlist:

There are no new pre-market setups for today.

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 = + $284

IYR short (275 shares from March 13 entry) – sold short 85.75, stop 88.69, target 78.30, unrealized points = (0.75), unrealized P/L = ($206)

USO long (450 shares from April 5 entry) – bought 52.76, stop 50.89, target 56.40, unrealized points = (0.75), unrealized P/L = ($338)

Closed positions (since last report):

net P/L = ($546)

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

$73,936

Notes:

MTG Opening Gap Rules

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Edited by Deron Wagner,
MTG Founder and
Head Trader