Here’s my target for the DRG index

December 14, 2005
Deron Wagner

To nobody’s surprise, Greenspan and the gang raised the Federal Funds interest rate to 4.25% yesterday afternoon, but stocks reacted positively nevertheless. More important than the quarter-point rate hike were the accompanying comments that implied future rate hikes would become less frequent. As we typically see on Fed day, stocks spent most of the session trading in a narrow, sideways range, then became volatile after the 2:15 pm EST Fed announcement. Both the S&P 500 and Dow Jones Industrial Average rallied late in the afternoon and gained 0.5% by the close, but the Nasdaq Composite finished only 0.2% higher. Small and mid-cap stocks, often an accurate barometer of broad market health, lagged behind the other indices. The S&P 400 managed only a 0.1% gain and the Russell 2000 actually lost 0.1%. All of the indices closed off their intraday highs and near the middle of their respective ranges.

Although turnover was light throughout the first half of the day, it spiked substantially after the Fed announcement. Total volume in the NYSE showed a meaty 27% increase, while volume in the Nasdaq was 15% higher than the previous day’s level. The broad market gains on higher volume enabled both the S&P and Nasdaq to register a bullish “accumulation day” that signified institutional buying interest. However, it was a bit disconcerting that small and mid-cap stocks showed relative weakness because every recent broad market rally has been led by small and mid-caps. Market internals were also negative in the Nasdaq, adding to the mixed signals of yesterday’s stock market health. Advancing volume exceeded declining volume by a ratio of 3 to 2 in the NYSE, but declining volume in the Nasdaq was fractionally higher than advancing volume.

In the December 6, 2005 issue of The Wagner Daily (click to review it),
we provided an early heads-up to a potential bullish reversal that we felt was
setting up in the DRG Index. From December 6 – 12, the Pharmaceutical Index
continued to chop around in a narrow range, but yesterday’s surge caused the DRG
to break out above its downtrend line (which has now become the new support
level). From here, we expect the DRG to consolidate and eventually break out
above its prior high of November 11. Because the index recently formed a double
bottom on its daily chart, a breakout above the November 11 high would
technically signify the “higher high” that is necessary in order to confirm a
trend reversal. The big question, however, is how high will the DRG Index go?
Unlike an index or stock that is trading at a new 52-week high, the DRG still has a lot of prior price resistance and overhead supply that is associated with it. Therefore, it would be unrealistic to assume the index will simply blast off in the same manner that
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PowerRating) (Gold Trust) did over the past two weeks. It’s possible, of course, but not likely. When an index is reversing its trend, Fibonacci
is one of the best technical analysis tools for predicting the extent of the
retracement. The daily chart of DRG below illustrates yesterday’s break of the 3-month downtrend line, as well as the Fibonacci retracement levels:

Notice how the 38.2% Fibonacci retracement level converges
with resistance of the November 11 high. Such a convergence clearly marks that
315 level as being a major area of resistance. However, DRG will likely rally at least to its 61.8% Fibo retracement if it clears the 38.2% level. Interestingly, the 61.8% level roughly converges with resistance of the 200-day moving average, so that 200-MA makes an ideal upside target for the sector. Regular subscribers will see we are correspondingly stalking
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PowerRating) (Pharmaceutical HOLDR) for a potential long entry today.

As for the broad market, yesterday’s rally put the S&P 500 and Nasdaq within easy striking range of their November highs and fresh 52-week highs as well. The closing high in the S&P is 1,268 and the prior intraday high is 1,272. Therefore, expect to find some resistance between that range. But if the S&P clears 1,272, it could rally sharply due to the lack of overhead supply and a new multi-year high. Support will be found between 1,256 (20-day MA) and 1,258 (yesterday’s low).

In the Nasdaq, 2,273 marks the prior closing high that was set on December 2. Resistance of the prior intraday high is at 2,278 and was set on December 6. Support is between 2,244 (20-day MA) and 2,255 (yesterday’s low). We recommend you set alerts for these pivotal levels on both the S&P and Nasdaq because stocks are likely to remain on the lethargic side UNLESS either the S&P or Nasdaq clearly break out to new highs. Conversely, a break of the aforementioned support levels could trigger a change in our overall market bias.

Open ETF positions:

We are currently flat (regular subscribers to The Wagner Daily receive detailed stop and target prices on open positions and detailed setup information on new ETF trade entry prices. Intraday e-mail alerts are also sent as needed.)

Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and financial conferences around the world. For a free trial to the full version of The Wagner Daily or to learn about Deron’s other services, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com .

Here’s my target for the DRG index

BUY THE FEAR, SELL THE GREED

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