The timing model is once again back in neutral territory and was in danger of generating a sell signal had the broad market averages not recovered in the afternoon and closed near the highs of the day. We have only seen two days of strong buying in the market (on Dec. 17 & 18) since the market put in a big reversal candle on Nov. 28. The lack of explosive price action in stocks and the overall absence of big leadership stocks moving to new highs are the two major issues we have with the current rally attempt. We have also seen a pick up in volatility the past two weeks. Optimal performance for our style of trading (on the long side only) is achieved when market conditions are stable, making tight stops reliable. When volatility is high, tight stops are no longer reliable and the reward to risk ratios begin to suffer.

Just a reminder that we are publishing an abbreviated version of the Wagner Daily this week (only excel graphics and note section will be updated). The chat room will be open from Wednesday to Friday. The Wagner Daily will not be published on Tuesday, January 1, but normal publication will resume the following day.

The INP sell stop triggered on the open Monday and we closed the position out. For those who did not got stopped out of INP and are still long, we would continue to hold the position with a protective stop set at 57.44 (10 cents below Monday’s low).

Just a reminder that we are publishing an abbreviated version of the Wagner Daily this week (only excel graphics and note section will be updated). The chat room is closed on Monday, December 24 and there will be no webinar. The market is closed on Tuesday, December 25. We resume publication on Wednesday, December 26. The chat room will be open from Wednesday to Friday, and we will hold a webinar on Wednesday, December 26.

Earlier this week we mentioned the pick up in buying in the energy sector with $XLE breaking a short-term downtrend line and reclaiming its 50-day MA. The iShares Dow Jones Transportation ($IYT) has also perked up after breaking a year long downtrend line. There is no actionable setup right now, as we’d like to see $IYT form a 5-10 week base while holding above 92.00. An eventual breakout from this base would be the ideal entry point.

On the close of trading on December 18, our model for timing the stock market shifted from “neutral” to “buy” mode. This was based on the major indices breaking out above their 3-month downtrend lines, the lack of “distribution day” in the broad market, and the back to back “accumulation days” that were indicative of institutional buying.

After a week long shakeout below the 50-day moving average in early December, the iShares Home Construction Index ($ITB) broke out and closed at new 52-week highs yesterday. The base started back in October, with $ITB stalling out just below 21.00 after a 20% move out from the prior base. The early December shakeout formed a necessary higher swing low on December 6, after a violent shakeout below the 50-day MA in mid-October. Although we missed the breakout we will continue to monitor the price action for a second breakout entry or a pullback entry on 3-5 days of weakness.

After a week long shakeout below the prior swing low 10/31, iPath MSCI India Index ($INP) reversed sharply off the lows and back through the 50-day MA. We first mentioned $INP as a potential buy setup a few weeks ago after analyzing the weekly chart, which recently broke a two year downtrend line. After the initial thrust up, $INP has formed an 11-week base and is now back above the 50-day MA, attempting to put in a higher low. We are looking to build a position in $INP if it can hold support of the 20-day EMA and push higher. Trade details can be found in the today’s watchlist section…

In our December 14 commentary, we presented an annotated chart of S&P 500 SPDR ($SPY) and said, “Notice that $SPY will likely print a bearish shooting star candlestick pattern for the week. This is a topping pattern that often indicates near-term bullish momentum is running out.” Given that stocks printed another day of losses last Friday, that is exactly what happened. Furthermore, the rest of the broad-based indexes formed the same pattern on their weekly charts as well. This technically positions the broad market to be under additional selling pressure in the upcoming week ahead of the Christmas holiday.

Below is a longer-term weekly chart pattern of S&P 500 SPDR ($SPY), a popular ETF proxy for trading the benchmark S&P 500 Index. Notice that $SPY will likely print a bearish “shooting star” candlestick pattern for the week. This is a topping pattern that often indicates near-term bullish momentum is running out. Since a weekly chart is a longer-term interval than a daily chart, the formation of this shooting star pattern on the weekly chart is more important than if the the same pattern occurred on a daily chart…