The Wagner Daily | December 9, 2005

Commentary:

In typical fashion lately, what started off as a bullish morning ended up a bearish afternoon as the major averages sold off from midday, slicing 55.47 off the Dow, slashing 1.53 from the s&P and cleaving 5.56 points off of the Nasdaq Composite by the end of trade. Eerily similar to yesterday’s volume action, again we had an increase in overall volume in the markets intraday when the markets were selling off as opposed to rallying. An 11am check on the turnover situation put the NYSE overall volume at 6% less than same time Wednesday, and the Nasdaq down 3% by the same measure. What is interesting about these statistics is that the markets were sitting at the highs of the day at roughly 11:45 before a rally in crude and natural gas futures (pushing light sweet to $60.66/bbl and natural gas to $15.08 on the NYMEX) sapped their strength. As we see from the aforementioned figures, overall turnover started to heat up as the market sold off. This has bearish implications !
going forward and tells us that there is some institutional selling going on in this market and stocks are still experiencing some distribution after the torrid November runup. Weakness in the $sox ahead of Intel’s mid quarter update seemed to be another one of the catalysts for the selling. The Philadelphia Semiconductor Index shed xxx% from its open and was one of the worst performing sectors in the crowd. Software and retailers were also weak, as the markets turned in a solid distribution day at the close with overall turnover on the NYSE up by 5% and by 9% on the Nasdaq.

Given that we are starting to correct slightly here off of highs of the November rally, it would behoove us to take a look at some dailies of the Dow, Nasdaq and S&P and try to discern where support below us may lie and what technical events, if any, may provide that support going forward. One of the most basic gauges of near term bias is the 20 period moving average on daily charts. Generally, when a market or individual stock is “strong” and enjoying a sustained rally, pullbacks in prices tend to hold the 20ma and bounce off of it, therefore creating a constant upwards slope to this measure of direction. Recent price action in the S&P, Dow and Nasdaq has put the major averages right at or just below their respective 20 ma’s. Let’s take a look at those charts now to see how the markets are faring at this first line of defense for the bulls.

As we can see from the charts above, the Dow is showing relative weakness to the S&P and Nasdaq currently by selling off below the 20 ma (green) while the other two benchmark indices are currently managing to hold their respective 20ma’s. Notice how the 20ma acted as perfect intraday support yesterday for the S&P and Nasdaq whose lows of the session corresponded perfectly with the daily moving average.

Also annotated on the charts are Fibonacci retracement levels which are drawn from the lows of the November rally to its peak just last week. If the 20ma daily doesn’t hold, then the levels drawn above at 38.2% off of the highs (blue horizontal lines) should be valid support points that may be the staging area for further upward momentum. As this is a pretty confirmed rally at this point, we are simply looking at all technical events that may act as entry points for further longs. In doing so we are always very careful to remember that trading in anticipation of trend changes is never profitable over time. Rather, discerning where changes in trend may occur and then waiting for the change to actually take place (as confirmed by breaks of downtrend lines) is the path to steady profits. As we are so fond of saying in this publication, “trade what you see and not what you think”. Therefore, use the annotated charts above as a guideline only to see !
where technical events are likely to occur which increases the odds of reversals following through. This is because of a concept that we call “confluence” where there are many technical events happening at once. With any move in the markets or a particular stock, the general rule of thumb is the more technical events happening at a single juncture, the better.

One sector which is certainly firing on all cylinders and does look ripe for a purchase on a pullback is Oil Services. OIH which tracks the sector composed of stocks such as BHI, BJS, CAM, HAL, SLB and others, made new 52 week highs yesterday and is currently trading at levels never before seen since its inception in March of 2001. While we feel that the sector is a bit over extended at this point for an entry, the recent breakout over daily resistance puts this ETF “on the radar” for a pullback buy soon. The first major breakout over resistance on daily charts is usually buyable when it makes its first correction move, oftentimes back to the old resistance level which becomes new support. The annotated chart below illustrates the recent bullish action in OIH.

Morpheus has now gone into full on Oil Services stalk mode and will be reporting from the front shortly on a possible entry in this relatively strong ETF. Stay tuned………

Today’s Watchlist:

There are no new setups for today. In the bigger picture, we are currently favoring the long side of the market, but are fully cognizant of the fact that overall and intraday volume patterns are suggesting more of a correction before this rally resumes. To profit from this reaction we are currently short DIA and remain in cash with the rest of our portfolio standing at the ready for buyable pullbacks in strong ETF’s.

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 = + $428

Closed positions (since last report):

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

$43,462

Notes:

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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