This rally has legs! Here’s 4 reasons…

September 7, 2005
Deron Wagner

Not only did the broad market register impressive gains
yesterday, but it did so on higher volume as well. Total volume in the NYSE was
8% higher, while volume in the Nasdaq increased by 25% over the previous day’s
level. It was the second confirmed “accumulation day” in the NYSE and Nasdaq
within the past four weeks. Volume in both exchanges also came in above their
50-day average levels, but note that yesterday’s volume increase was slightly
skewed by last Friday’s large decline in volume that preceded the three-day
weekend. Market internals were also bullish. Advancing volume exceeded declining
volume by nearly a margin of 5 to 1 in the NYSE and just below 4 to 1 in the
Nasdaq. The positive breadth was confirmed by the fact that nearly every
industry sector we follow closed higher yesterday.

(
BBH |
Quote |
Chart |
News |
PowerRating) (Biotech HOLDR) gained 1.7% and closed exactly at
$200, a new high not seen since September of 2000.
(
SMH |
Quote |
Chart |
News |
PowerRating) (Semiconductor
HOLDR), which we also have been following closely the past several days, gained
1.4% and closed within pennies of the upper channel of its recent trading range.
Biotechs are showing more relative strength than the Semis overall, but SMH now
presents a good risk/reward ratio for long entry if it rallies and holds
above yesterday’s high. Yesterday’s low of 36.60 perfectly coincides with
support of the 20-day moving average, so a logical place for your protective
stop would be just below that level. The blue horizontal line on the daily chart
of SMH below illustrates the point where SMH will break out of its four-week
consolidation. If you buy the breakout, a stop below the 20-day MA (beige line)
is a good idea:

While most industry sectors closed higher yesterday,
(
GLD |
Quote |
Chart |
News |
PowerRating)
(StreetTRACKS Gold Trust) was one of the few ETFs that closed slightly lower.
However, this was not a big deal because it did not yet trade above our trigger
price to buy. We continue to stalk GLD for entry today because we still like the
setup.

Yesterday’s broad-based rally enabled the Dow Jones
Industrials to close above its 20, 50, and 200-day moving averages for the first
time since August 15. The Dow also closed above its intermediate-term downtrend
line from the high of August 10. Both of these factors certainly make the Dow
look better, but a lot of overhead supply remains from the prior highs of July
and August. More importantly, the Dow is now coming into resistance of its
primary weekly downtrend line that began with the high of March 2005. The
descending blue line on the weekly chart below illustrates resistance of the
primary downtrend line:

The Dow’s breakout above its moving averages and the
intermediate-term downtrend line means there is no longer a positive risk-reward
for shorting DIA at the current level. However, until the six-month downtrend
line is broken, caution is required on the long side.

Unlike the Dow, which has been trending lower for six months,
the S&P 500 has only been in a downtrend since August 3. The S&P also closed
above its March high, which the Dow is still trading below. The blue dotted line
on the weekly chart of below illustrates how the S&P closed above its March
high. The descending red line shows that the index also closed above its
one-month downtrend line:

Yesterday’s rally put the S&P within only 1% of its 52-week
high and also above its 61.8% Fibonacci retracement from the August high down to
its August low. As such, there is a minimal amount of overhead resistance on the
S&P. Because of this, we feel the S&P is likely to test resistance of its
52-week high within the next week or two. The weekly chart of the Nasdaq
Composite looks very similar to the S&P 500, although the index is still 2.3%
off the high. Resistance of the January 2005 high, just below the August high
and at the 2,191 area, is a factor to watch if the Nasdaq attempts to
follow-through to the upside.

Open ETF positions:

Long BBH, short IWM (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 .

This rally has legs! Here’s 4 reasons…

BUY THE FEAR, SELL THE GREED

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