Wagner Daily Lite – Feb. 22, 2012 ($SRS, $OIL)

For the second time in as many days, stocks ended the session mixed. The major indices were under pressure for most of the session but a late day rally salvaged what could have been a very negative day on Wall Street. For the most part the broad market held up well but there were signs of selling into strength. This is the second time we’ve seen this type of price action in the past seven sessions. The DJIA and the S&P 500 showed the most resiliency as both indices closed higher by 0.1%. The Nasdaq shed 0.1% while the S&P MidCap 400 and small-cap Russell 2000 dropped 0.4% and 0.7% respectively. The top performing sectors included gold, gold miners, oil & gas, computer hardware and internet services. Underperforming sectors included retail, airlines, biotechnology, semiconductors and homebuilders.

Internals ended mixed on Tuesday. Volume slid by 7.2% on the Nasdaq and 13.1% on the NYSE. However, advancing volume managed to outpace declining volume by a ratio of 1.1 to 1 on the Big Board. On the Nasdaq, declining volume held the upper hand by a factor of 1.8 to 1.

Since October of 2011, the ProShares UltraShort Real Estate ETF (SRS) has been in a significant downtrend. However, over the past 2.5 weeks, SRS has been consolidating in a tight range as it has set a sequence of higher lows. Further, SRS has rallied above its 10-day MA and is now poised to break above its 20-day EMA. A volume fueled move above yesterday’s high of $32.41 could provide a buying opportunity in this ETF.

Over the past two weeks the iPath Goldman Sachs Crude Oil ETN (OIL) has been showing relative strength to the broad market. Yesterday, OIL broke to new highs on a massive spike in volume. The ideal entry point for this trade would have been on February 13th when OIL broke above its short term downtrend line. Now that OIL has surged higher, it is not advisable to “chase the trade”. Instead, we will be looking at a possible long entry into a pullback. An undercut of support near $26.30 could provide a buy entry for this ETN. We are montoring OIL closely for a possible long entry.

We exited our long positions in DVY and SOXL yielding solid profits. We also exited XLU for a small loss. We made a judgment call to reduce our exposure to the market due to the negative price action in the early afternoon session. In addition, SOXL and XLU were exhibiting relative weakness and it therefore made sense to exit both trades given market conditions. IAU hit its adjusted trigger and we entered the trade yesterday. IAU closed at the high of the session. Although we remain bullish on the market, it appears that we could see a pullback, or at a minimum, sector rotation. We believe that it is best to stay mostly in cash until new setups develop.

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