The Wagner Daily | December 27, 2005

Commentary:

The major indices traded in a narrow, sideways range last Friday and finished the pre-holiday session near the flat line. The S&P 500 spent the entire day in a tight range of less than four points before finishing the day unchanged. Action in the Nasdaq Composite, which closed 0.1% higher, was equally uneventful. The Dow Jones Industrials closed lower by less than 0.1%, but both the small-cap Russell 2000 and mid-cap S&P 400 indices gained 0.3%. All but one of the industry sectors we follow closed up or down by less than 1%. The Computer Networking Index ($NWX) showed the most relative strength and gained 1.3%.

As one might expect, turnover in both exchanges fell to the lowest levels of the year ahead of the three-day Christmas holiday. Total volume in the Nasdaq declined by 38%, while volume in the NYSE was 28% lighter than the previous day’s level. The extremely light volume levels indicate that most of last Friday’s activity was driven by retail investors. As such, it would be frivolous to place much emphasis on analyzing the significance of the day’s trading activity. Volume levels are likely to remain lower than average in the upcoming week, as many traders will be on vacation until after New Year’s Day.

Not much has been happening on the daily charts of the major indices during the past several weeks, but the longer-term weekly charts show the bullish consolidation remains in effect. The S&P 500 has been oscillating in a tight range between 1,246 and 1,275 for the past five weeks. Although it makes for lackluster trading in the short-term, the important thing is that the narrow-range consolidation near its four-year high should soon lead to new highs being registered. The longer an index consolidates in a narrow range, the more powerful the move will be when it eventually comes. We expect a significant range expansion shortly after the new year begins (or perhaps even sooner). The weekly chart of the S&P below shows a bullish “big picture” that overlooks the day-to-day chop on the daily charts:

The consolidation in the Nasdaq has been a bit looser, but the index formed a bullish “hammer” candlestick last week. It also bounced perfectly off support of the prior high from August 2005. The horizontal dotted line on the chart below marks the support level that enabled the Nasdaq to reverse last week:

Remember that our current short-term strategy is to remain on the sidelines until New Year’s Day has passed, but be actively preparing a list of sectors that are acting well in the meantime. Currently, we are stalking three industries for potential long re-entries in January: Gold ($GOX), Biotech ($BTK), and Pharmaceuticals ($DRG). Gold has the strongest looking charts of the three and the $GOX is also sitting at an all-time high. The Biotech industry is poised to resume its weekly uptrend and has been acting great since bouncing off support of its 50-day moving average on December 20. The $BTK index is less than 1% away from closing at a new 5-year high. The Pharmaceutical sector has a lot of overhead supply on its weekly chart, but last week’s breakout shows promise, especially since the index is holding nicely above its 200-day moving average. We expect further upside on the trend reversal that is taking place in the $DRG.

As always, we will be providing the usual technical analysis and market commentary during the holiday period, but entering new positions at this time is not advisable. Overtrading is easy to do in a light volume environment, and it only leads to churning your trading account. If you are currently flat, relax and take some time off. The market will certainly be here when you are ready to return, and remaining in cash during this time period is likely to save you money. If, however, you are already in positions that you like, simply set your good-til-canceled (GTC) stop orders and cruise into the end of the year as well.

Note that the U.S. equities markets will be closed on Monday, January 2. As such, The Wagner Daily will not be published that day, but regular publication will resume on January 3. MTG wishes you and your family a safe and happy ride into the new year!

Today’s Watchlist:

Per the commentary above, we do not plan to enter any new positions between now and New Year’s Day. We will, however, send an e-mail alert if something really grabs our attention in in the interim.

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 = ($168)

Closed positions (since last report):

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

$20,439

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