The Wagner Daily | February 4, 2009

Commentary:

Aided by a handful of better than expected corporate earnings reports, the Nasdaq scored its second straight day of significant gains. This time, the rest of the major indices rallied as well. The Dow Jones Industrial Average climbed 1.8%, the S&P 500 1.6%, and the Nasdaq Composite 1.5%. The small-cap Russell 2000 and S&P Midcap 400 indices advanced 0.7% and 0.8% respectively. A solid afternoon performance enabled all the main stock market indexes to finish near their best levels of the day.

The most encouraging aspect of yesterday’s market action was that higher turnover accompanied the stock market’s gains. Total volume in both the NYSE and Nasdaq edged 2% above the previous day’s levels. Considering both the S&P 500 and Nasdaq Composite suffered a bearish “distribution day” only two days prior, it was positive that stocks bounced back with a round of higher volume gains. The longer the market continues displaying regular signs of institutional buying, the better the chance of a sustainable, real recovery from the November 2008 lows. Because mutual funds, hedge funds, and other institutions account for more than half of all stock market activity, overall market direction is typically dependent on whether the “big boys” are accumulating or distributing shares. That’s why we constantly monitor and track sessions of higher volume gains (“accumulation days”) and higher volume losses (“distribution days”).

Yesterday, we illustrated how iShares Nasdaq Biotech (IBB) had been showing relative strength and was poised for breakout. As anticipated, its breakout came yesterday, as the Biotech Index ($BTK) led the Nasdaq with a 3.7% gain. While biotech ETFs such as IBB, BBH, and PBE motored higher yesterday, the actual $BTK Index had a convincing breakout above the high of its recent consolidation. This is shown below:

If the overall market holds up, biotech has a good shot at becoming a leading industry sector. As per yesterday’s plan, we bought IBB when it rallied above its four-day high. The clear relative strength in biotech makes IBB a better play than attempting to navigate the choppy performance of broad-based ETFs.

The Nasdaq Composite’s recovery of the past two days has once again positioned the index to test resistance of its 50-day moving average (MA), which is now converging with the 20-day exponential moving average (EMA) as well. On the daily chart below, notice how frequently the 50-day MA (the teal line) has acted as resistance over the past two months:

Though the Nasdaq popped above its 50-day MA in early January, and then again in late January, the 50-day MA has failed to provide support on the pullbacks. If the Nasdaq reclaims its 50-day MA again, will it simply slide back below it a few days later? Perhaps, but this time may be different if the index manages to rally above resistance of its five-month downtrend line, which is shown on the longer-term weekly chart below:

Regardless of whether or not the Nasdaq breaks out from here, the Dow Jones Industrial Average may continue to weigh on the performance of the broad market (as analyzed in yesterday’s commentary). As such, sectors related to the Nasdaq are probably a safer buy than anything related to the Dow or S&P. Of these, we would focus on the biotech ETFs (as well as gold/silver commodity ETFs). On the short side, keep an eye on the inversely correlated UltraShort Oil and Gas ProShares (DUG). It is setting up for a possible buy entry above its 50-day MA ($26.16), which would break a multi-month downtrend line as well.

Today’s Watchlist:

There are no new setups in the pre-market today. As per above, we’re monitoring DUG for a possible buy entry, but we don’t want to list another definite short setup until we see whether or not the Nasdaq breaks out from here. If we buy DUG intraday, we’ll promptly send a detailed alert.

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. Please review the Wagner Daily Subscriber Guide for important, automatic rules on trigger and stop prices.

Open positions (coming into today):

unrealized P/L = + $1,256

GDX long (150 shares from Dec. 26 entry) –

bought 31.40, stop 26.48, no target (will trail stop), unrealized points = + 1.96, unrealized P/L = + $294

SRS long (100 shares from Jan. 30 entry) –

bought 57.40, stop 53.70, no target (will trail stop), unrealized points = + 1.59, unrealized P/L = + $159

IBB long (150 shares from Feb. 3 entry) –

bought 72.12, stop 68.52, target 78.80, unrealized points = + 0.55, unrealized P/L = + $83

UGA long (200 shares total — 100 from Jan. 29 entry, 100 from Jan. 30 entry) –

bought 23.42 (avg.), stop 20.49, target 30.45, unrealized points = (1.82), unrealized P/L = ($364)

Closed positions (since last report):

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

$34,669

Notes:

Our pre-market setup to buy IBB triggered yesterday afternoon.
We’ve tightened the stop on SRS to reduce our capital risk, as a Nasdaq breakout could pull other sectors along as well.
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Edited by Deron Wagner,
MTG Founder and
Head Trader