Commentary:

Stocks followed-up last Friday’s bullish “accumulation day” with a modest sell-off yesterday, but lighter volume helped minimize the losses. The major indices started the day near the previous day’s highs, but subsequently drifted lower throughout the rest of the session. The Nasdaq Composite slipped 0.1%, the S&P 500 0.2%, and the Dow Jones Industrial Average 0.3%. The small-cap Russell 2000 dipped 0.2%, though the S&P Midcap 400 managed to gain 0.2%. Large caps, which have led the broad market’s recovery off the March lows, took a breather yesterday. The S&P and Dow both closed near their intraday lows, as the Nasdaq settled just under the middle of its range.

Total volume in the Nasdaq receded 7% below the previous day’s level, while volume in the NYSE decreased 26%. The lighter volume losses were positive, as it indicates institutions were not laying on the sell button yesterday. Rather, the bulls simply took a rest. Nevertheless, don’t forget that the Nasdaq has had four “distribution days” within the past two weeks, most of them just last week. Market internals in both exchanges were just fractionally negative.

Since breaking out of its six-month sideways range on April 19, the Semiconductor HOLDR (SMH) has been acting well. It has consolidated nicely over the past several days, enabling the 20-period exponential moving average on the hourly chart to rise and provide support. Unlike other failed breakout attempts over the past six months, SMH has been holding above its breakout level. Therefore, we now have enough confirmation to buy SMH with an entry above yesterday’s high:

It is important to wait for SMH to clear yesterday’s high before buying, as that provides one more level of confirmation that the breakout above the range will remain intact. With such an entry point, a protective stop could be placed 20 to 30 cents below support of the pivotal breakout level of $35.95.

Texas Instruments (TXN), a heavily weighted stock within SMH, reported its quarterly earnings after yesterday’s close and was trading sharply higher in the after-hours market. If it remains that way into today’s open, it will cause SMH to gap higher as well. If you’re new to trading, it may go against your instincts to buy stocks and ETFs that gap open much higher than your anticipated entry. However, when an equity gaps on strong volume, it is actually safer than buying a stock or ETF that merely trades through its trigger price intraday. This is because opening gap ups are caused by strong institutional demand, the fuel that drives the stock market day-in, day-out. When a stock or ETF gaps up and holds, it usually goes much higher. But to help ensure the gap will hold firmly before buying, we always follow a set of rules called the MTG Opening Gap Rules. If you have not already done so, we suggest you take a moment to click on the link and review these rules.

In addition to SMH, we still like the iShares Software (IGV) for long entry as well. It tested support of its recent breakout on April 19, but held above the pivot and resumed its price consolidation. As with SMH, we would buy IGV over yesterday’s high, as that would also push it above the range of its short-term consolidation:

We continue to monitor the Pharmaceutical and Biotech-related ETFs for potential long entries. Both sectors are on fire and have had parabolic runs since breaking out above resistance. Specific ETFs we would consider buying on a pullback to support of their 10-day moving averages include: Pharmaceutical HOLDR (PPH), FirstTrust Biotech (FBT), iShares Biotech (IBB), and the StreetTRACKS Biotech (XBI). Of the biotech ETFs, FBT has the most relative strength and is the only one trading well above its prior highs. Conversely, note we are not looking for an entry in the Biotech HOLDR (BBH) because it continues to lag far behind the others. The divergence between FBT and BBH was originally analyzed when we first pointed out the Biotech breakout in the April 13 issue of The Wagner Daily.

For those of you who trade ETFs that track commodities such as gold and oil, we wish to make you aware of another one that was launched last week. The U.S. Natural Gas Fund (UNG), which commenced trading on April 18, is the first ETF that exclusively mirrors the price of the natural gas futures contract. There is often a great deal of price divergence between oil and natural gas, so having separate ETFs that track each commodity enables one to focus on whichever is showing the most relative strength. This ETF is discussed in greater detail in the Exchange Traded Funds section of today’s Investors Business Daily, in which I also provide further comments about it.

In yesterday’s newsletter, we mentioned that the Oil Service HOLDR (OIH) may be setting up for an intermediate-term correction if it fell below support of its 20-day EMA. Not only did it not break below that moving average, but we no longer like the setup for a potential short even if it does. Upon further analysis, we noticed too great a price divergence between the chart patterns of OIH and the individual leading stocks that comprise the sector. Specifically, many of the large-cap oil service stocks, such as Halliburton (HAL) and Baker Hughes (BHI), are in the process of trying to reverse their weekly downtrends. If they do, OIH will move higher as well. Crude oil also appears to be holding support of its 200-day MA, which would further work against OIH. As a courtesy, we are simply informing subscribers that we no longer like OIH for potential short sale.

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Today’s Watchlist:

SMH – Semiconductor HOLDR
Long

Shares = 800
Trigger = 36.27 (above yesterday’s high)
Stop = 35.63 (below the breakout pivot)
Target = 38.40 (resistance of May 2006 high)
Dividend Date = (paid monthly based on individual stock distributions)

Notes = See commentary above for explanation of the setup. Note that SMH is likely to gap open above our trigger price due to the strong after-hours performance of Texas Instruments. If it does, we will be using the MTG Opening Gap Rules to adjust the entry price to 10 cents above the high of the first 20 minutes. If it gaps and subsequently fails to rally above its 20-minute high, we will not enter the play. In the event of a large gap, the protective stop will also be raised and you will be notified via intraday e-mail alert.

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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):
GLD long (500 shares total — 400 shares from March 28 & 100 shares from April 20) –

bought 66.62 (avg.), stop 66.89, target new high (will trail stop), unrealized points = + 1.64, unrealized P/L = + $820

Closed positions (since last report):

IYR short (275 shares from March 13 entry) – sold short 85.75, covered 87.80, points = (2.05), net P/L = ($569)

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

$58,294

Notes:


IYR hit our trailed stop yesterday, as it appears the REITs are now trying to put in a bottom instead of making another leg lower.

Please check out the Wagner Daily Subscriber Guide to learn how to get the most from your subscription.

Edited by Deron Wagner,
MTG Founder and
Head Trader