The Wagner Daily


Stocks marched to their fourth straight day of gains last Friday, but lighter volume again failed to confirm the strength. The Nasdaq Composite advanced 0.4%, enabling the index to close at another fresh six-year high. Both the S&P 500 and Dow Jones Industrial Average rallied 0.3%, but remained below resistance of their prior highs. The small-cap Russell 2000 also gained 0.3%, while the S&P Midcap 400 outperformed by closing 0.6% higher. After trending higher for most of the session, each of the major indices finished in the upper quarter of their respective intraday ranges.

Although the market scored gains every day last week, it did so on steadily declining volume. Total volume in the NYSE was 9% lower than the previous day’s level, while volume in the Nasdaq fell less than 1%. Adjusting for last Tuesday’s early close, turnover successively dropped as stocks moved higher in each of the four days. In both exchanges, last Friday’s volume was the lowest since June 18. Higher volume on any one of the Nasdaq’s new closing highs would have indicated the presence of institutional buying activity, but all the gains lacked the confirmation of increasing turnover. Still, this was not surprising considering the Independence Day holiday fell in the middle of the week. We expect volume to return to average levels as traders begin returning to their desks today.

The Gold and Silver Index ($XAU) surged 3.3% last Friday, making it the biggest gainer of all the major industry sectors. Though it had been in a choppy, sideways range for the past several months, Friday’s gains enabled the index to break out of its recent range. Looking at the weekly chart, notice that the $XAU Index also closed above resistance of a 14-month downtrend:

Not only did the $XAU close above its weekly downtrend line, but many individual gold and silver mining stocks rallied on higher than average volume last Friday. The numerous breakouts on strong volume pointed to institutional money rotation back into the gold and silver sector. This can also be seen in the high volume breakout of the Market Vectors Gold Miners ETF (GDX), which matched the 3.3% gain of the $XAU Index. As you can see on the daily chart, GDX broke out on double its average daily volume of 791,000 shares:

Because of its breakout above the 50 and 200-day moving averages, as well as the downtrend line, we will be looking for a long entry in GDX over the next several days. Since it closed at its intraday high on Friday, an opening gap down today would present a low-risk entry point on the long side. For those who trade individual stocks as well, Silver Wheaton Corp. (SLW) has the best looking chart pattern of the group. The StreetTRACKS Gold Trust (GLD), which mirrors the price of the spot gold commodity, is currently showing relative weakness to the individual gold and silver mining stocks. Therefore, we prefer an entry in GDX rather than GLD.

After bouncing off support of its 200-day moving average AND long-term uptrend line two weeks ago, the Biotech Index ($BTK) is another sector that may now be poised for a bullish trend reversal. The long-term weekly chart below illustrates the bounce off support of the primary uptrend line, while the daily chart that follows shows the tight-range consolidation over the past week. A rally over last week’s high would push the $BTK back above horizontal price resistance of 787.93 (the red dashed line on the first chart below):

Biotechs have been stagnant in the intermediate-term. However, the recent bounce off both the long-term uptrend line and 200-day MA, followed by last week’s narrow-range consolidation, may attract institutional buying interest in the coming days. Buying sectors in long-term uptrends that have pulled back to shorter-term support levels sometimes carries a lower risk of getting shaken out than buying sectors that break out to new highs.

As for the Biotech ETFs, stay clear of the Biotech HOLDR (BBH). Because this ETF is so heavily weighted by the under-performing Genentech (DNA), its daily chart pattern looks nothing like that of the actual $BTK Index. Instead, consider the iShares Nasdaq Biotech (IBB), which is buyable over last week’s high. Along with GDX, we are also stalking IBB for potential long entry this week. Regular subscribers to The Wagner Daily should note our trigger, stop, and target prices below.

The major indices are still telling a tale of two markets. The Nasdaq continues to post new multi-year highs, making QQQQ buyable on a light to moderate pullback. Conversely, both the S&P and Dow remain stuck below resistance of their prior highs from early June. Neither index is above its 20 and 50-day MA by a wide margin. In the coming week, we expect some sort of resolution. Either the Nasdaq stands firm and finally pulls the S&P and Dow back to new highs OR the latter indices head back down below their 50-day MAs and pull the Nasdaq along with them. There are presently more long setups than short setups, lending favor to the strength in the Nasdaq. But just remember that all of last week’s gains occurred without the significant presence of institutional trading activity. Finally, be aware that quarterly earnings season officially kicks off today. Be sure to note the earnings dates of any individual stocks you enter in the coming weeks.

Today’s Watchlist:

GDX – Market Vectors Gold Miners ETF

Shares = 200
Trigger = BELOW 40.12 (slight pullback from Friday’s breakout)
Stop = 38.12 (below support of 20, 50, and 200-day MAs)
Target = new high (will trail stop)
Dividend Date = December, 2007

Notes = See commentary above for explanation of the setup. Note that this is a pullback entry, rather than the typical breakout above a given price. If GDX does NOT pullback to the trigger price, assume we are not yet buying UNLESS we send intraday e-mail alert on the contrary.

IBB – iShares Nasdaq Biotech

Shares = 200
Trigger = 79.36 (above the 20-day EMA and last week’s high)
Stop = 77.42 (below the June 29 low)
Target = 83.20 (resistance of May high)
Dividend Date = December, 2007

Notes = See commentary above for explanation of the setup.

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):

      FXC long (250 shares from July 6 entry) – bought 95.51, stop 93.54, target new high (will trail stop), unrealized points = (0.10), unrealized P/L = ($25)

    Closed positions (since last report):

      EWH long (450 shares from July 6 entry) – bought 17.97, sold 17.94, points = (0.03), net P/L = ($23)

      EWO short (450 shares total – 300 shares from June 6, 150 shares from June 20) –

      sold short 40.68 (avg.), covered 40.86 (avg.), points = (0.18), net P/L = ($90)

      XLE short (200 shares – re-entry from July 6) – sold short 70.91, covered 71.54, points = (0.63), net P/L = ($130)

      KCE short (200 shares from June 29 entry) – sold short 69.40, covered 71.29, points = (1.89), net P/L = ($382)

      XLE short (200 shares from June 29 entry) – sold short 69.38, covered 71.28, points = (1.90), net P/L = ($384)

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



      Last Friday was an active AND a choppy day. XLE stopped out two minutes after the open, but we re-entered the short position when the opening gap appeared to be failing. We later closed the re-entry when XLE rallied back to a new intraday high. KCE hit its stop by a penny, though resistance of the prior uptrend line remains overhead. EWO triggered our stop by a penny and immediately fell back. Because we trailed the stop lower, EWO was a scratch (less than $100 winner or loser).

      Our two long setups, EWH and FXC, both gapped open above their trigger prices last Friday. Unfortunately, that skewed the risk/reward of the trades a bit. As such, we made the decision to scratch EWH when it began reversing lower into the close. We remain long FXC.

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    Edited by Deron Wagner,
    MTG Founder and
    Head Trader