The Wagner Daily | December 7, 2005

Commentary:

Stocks posted modest gains yesterday, but the volatile session was plagued with indecision caused by a tug-of-war between the bulls and bears. After beginning the day with an opening gap higher, the broad market drifted lower throughout the first forty-five minutes, but promptly reversed and rallied throughout the morning session. Because the major indices subsequently consolidated near their intraday highs, further gains in the afternoon would not have been a surprise. Instead, sellers arrived on the scene during the final hour and erased the morning gains and then some. The S&P 500 and Nasdaq Composite both eked out 0.1% gains, while the Dow Jones Industrials managed to hold 0.2% of its gain. The small-cap Russell 2000 also advanced 0.2%, but the mid-cap S&P 400 closed lower by less than 0.1%.

Total volume in the Nasdaq was 9% higher than the previous day’s level, causing the index to register a bearish “distribution day.” Like the S&P, the Nasdaq has now had three such days of institutional selling since the beginning of last week. In the NYSE, a 4% decline in yesterday’s volume prevented that exchange from having its fourth “distribution day.” Advancing volume exceeded declining volume by a margin of 3 to 2 in both exchanges, which was positive, but market internals were much stronger before the final hour’s sell program kicked in.

Once again, the gold and silver mining stocks shined brightly yesterday. The price of Spot Gold was nearly unchanged, but the mining stocks themselves showed great relative strength and played “catch up” to the commodity price. The CBOE Gold Index ($GOX) surged 3.0% to a fresh record high, causing a majority of the individual mining stocks to blast off to new highs as well. Newmont Mining (NEM), which we purchased via intraday alert to Stalk Sheet subscribers yesterday, broke out of a bullish cup and handle pattern on strong volume and closed at a new 52-week high. Unfortunately, there is not an ETF that tracks the mining stocks because GLD only mirrors the actual price of spot gold. Astute traders, however, can make their own “synthetic ETF” by simultaneously trading a small basket of the leading stocks within the gold/silver mining sector (or any other sector for that matter).

Also showing relative strength to the broad market yesterday was the Semiconductor Index ($SOX), which gained 1.0%. But the Biotech Sector ($BTK), which has been leading the Nasdaq, fell 0.9%. It worked out well that we took our small profit on BBH (Biotech HOLDR) yesterday because the ETF failed to hold its consolidation and dropped 1.7% yesterday. Consider using tight stops if you’re holding any Biotech stocks because it appears the sector may be headed for a correction. Remember you can always re-enter positions you like, often at a better price.

Despite yesterday’s small gains in the S&P and Nasdaq, the overall price action was negative. The late-day selloff that followed the morning rally caused each of the major indices to close near their intraday lows. It also resulted in the formation of bearish “inverted hammer” candlestick patterns on numerous daily charts. We have circled the “inverted hammer” candlesticks on the daily charts of both SPY (S&P 500 Index) and QQQQ (Nasdaq 100 Index) below:

“Inverted hammer” candlesticks are bearish because they trap the bulls who bought the strength earlier that day. As such, they typically are forced to sell the next day, which in turn attracts more sellers, both bulls dumping their long positions and bears entering new short positions. When “inverted hammers” occur after an extended rally, it often, but not always, is a warning sign of an impending market correction. If you consider the numerous “distribution days” the markets have recently begun experiencing, the odds of at least a short-term correction are further increased. Due to the Dow’s inability to break out above the 11,000 resistance level, we entered a new short position in DIA yesterday. We’re not expecting a huge collapse or anything like that, but we do anticipate at least a one-week correction, perhaps longer if bearish momentum begins to set in.

Yesterday’s erratic price action was a perfect example of why we began recommending a mostly cash position in yesterday morning’s Wagner Daily. Although we dipped a toe in the bearish waters by shorting DIA yesterday, it is our only open ETF position. Due to several mixed technical signals, we feel that now is not the time to have a strong opinion on which way the markets are headed in the short-term. Remaining positioned mostly in cash will enable you to take advantage of the next clear opportunities when they present themselves. Above all, remember to trade what you see, not what you think!

Today’s Watchlist:

Per the commentary of the past two days, we want to remain mostly in cash right now. We are now short DIA and will consider new positions over the next few days, depending on market conditions.

Daily Performance Report:

Below is an overview of all open positions, as well as a performance report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on the $50,000 Wagner Daily model account size. Changes to open positions since the previous report are listed in red text below:

Open positions (coming into today):

unrealized P/L = + $4

Closed positions (since last report):

Current equity exposure ($100,000 max. buying power):

$43,462

Notes:

Click
here for glossary and explanation of terms used in The Wagner Daily

Click here to view MTG’s past performance results (updated monthly).

Edited by Deron Wagner,
MTG Founder and
Head Trader