Wagner Daily Lite – Feb. 6, 2012 ($SPX, $COMPX, $DJI, $SOXL, $IYZ, $PPH, $IYT, $DVY)

Wall Street was smiling last Friday, as stocks ripped higher and the Nasdaq Composite claimed an 11 year high. All five major indices posted impressive gains, with the small-cap Russell 2000 leading the march higher, to a 2.2% gain. Both the Nasdaq and S&P MidCap 400 indices tacked on 1.6% while S&P 500 surged 1.5%. The Dow Jones Industrial Average couldn’t keep up with the hot pace of the other indices, but still managed a 1.2% gain. Sectors showing the most strength included solar energy, real estate, software, internet, oil services, networking and banking. Precious metal, healthcare and pharmaceuticals all underperformed.

Internals ended the week on a bullish note. Volume surged by 12.4% on the Nasdaq and 13.2% on the NYSE. Advancing volume easily overpowered declining volume by 6.1 to 1 on the NYSE and 5.1 to 1 on the Nasdaq. The confluence of price action and market internals makes a clear case that institutional buying amongst mutual funds, hedge funds, and banks supported the market last Friday. Consequently, last Friday was a bullish “accumulation day” for the broad market.

Given last Friday’s strong breakout price action, this is a good time to review important resistance levels for the main stock market indexes. Last week, we stated that the market appeared likely to rally and “overcut” last summer’s highs. As you will notice on the charts of the Nasdaq Composite, S&P 500 and Dow Jones Industrial Average below, we are now at or near key resistance levels on all three indices. It is impressive that the Nasdaq set a fresh 11-year high last Friday, but it is also important to note that none of the other major indices can make the same claim, and remain below pivotal resistance levels. Since we are close to testing and/or overcutting key resistance levels right now, it is very important to exercise caution and only take on potential long entries in ETFs and stocks with the most relative strength to the broad market:

As we have been stating repeatedly over the past week, we are planning on selling our positions into strength. Last Friday, we followed this plan by selling both SOXL and IYZ, locking in solid gains of 11% and 4% respectively. We remain positioned in IYT and DVY, and still have PPH on the watchlist as a long candidate. As usual, subscribers to The Wagner Daily will be notified via Intraday Trade Alert when we sell our open positions or make any new swing trade entries. There is little question that the market is quickly reaching severe near-term overbought levels, as are many ETFs. This is what is driving our desire to sell into strength. By no means are we suggesting that we’re bearish on the market; rather, the likelihood is growing that this phase of the bull market rally may be approaching a level that is unsustainable in the near-term.