The Wagner Daily | December 30, 2005

Commentary:

The broad market traded in a tight and narrow sideways range throughout most of the session, but a selloff during the final hour caused the major indices to close modestly lower. The S&P 500 fell 0.3% and the Nasdaq Composite dropped 0.5%, but the Dow Jones Industrials gave up only 0.1%. The small-cap Russell 2000 and mid-cap S&P 400 indices each lost 0.3%. The major indices all closed near their intraday lows, typically a sign of institutional selling. One marginal positive that could be derived out of yesterday’s session is that turnover in the NYSE declined by 2%. Total volume in the Nasdaq was unchanged from the prior day. Another “distribution day” in the current week would have caused major pressure in stocks entering next month. But even without further losses on higher volume, the technical damage to the daily charts is already occurring.

In the December 28 issue of The Wagner Daily, we analyzed the daily chart of the Oil Service index ($OSX) and discussed a potential short in OIH (Oil Service HOLDR). If you went through with shorting OIH at that time, the trade appears to be working out fine so far. The Oil Service index bounced slightly on Wednesday, but sold off and closed near the December 27 low yesterday. Looking at the daily chart of OIH below, notice how OIH is very close to breaking horizontal price support around the $128 level (as marked by the blue horizontal line):

Because it is consolidating near the lows of its recent range after breaking its daily uptrend line three days ago, we now expect the Oil Service Index to break its horizontal support level within the next one to days. If it does, our first downside target on correpsonding OIH would be the 50-day moving average, presently at $123.63. Beyond that, we could mark the high of the subsequent bounce and trail a stop to maximize gains and protect profit.

The S&P 500 closed yesterday below its December 27 low, and hence formed a “lower low” on the daily chart that coincides with this week’s “lower high.” With the S&P still trading above its 50-day MA, it is too early to confirm a reversal of the intermediate-term uptrend, but bulls should definitely be cautious here:

Finally, keep a close eye on the Semiconductor Index ($SOX) in the coming days, as it closed yesterday at key support of its recent consolidation. A confirmed close below the 481 level in the $SOX could trigger a wave of selling that would send the $SOX at least down to its 50-day MA:

Like last Friday, December 23, we expect today’s volume to be among the lightest levels of the year. As mentioned on numerous recent occasions, lower than average volume often leads to erratic and choppy behavior. But the good news is that the holiday season will have passed when things get rolling again next week. At that point, we will see the true intentions of institutional activity and can easily position ourselves on the correct side of the market if we are mostly cash going into next week. We remain short IWM, which is looking pretty good, and will begin entering new ETF positions next week 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 “official” positions between now and New Year’s Day. However, advanced traders may consider shorting OIH over the next few days (review the chart and commentary above).

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 = + $126

Closed positions (since last report):

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

$20,145

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