The Wagner Daily | January 26, 2006

Commentary:

After beginning the day with an upside opening gap, stocks trended lower and into negative territory, but a modest rally in the final hour minimized yesterday’s losses. The S&P 500, Nasdaq Composite, and small-cap Russell 2000 indices each lost 0.2%, while the Dow Jones Industrial Average was unchanged. For the first time in a while, the mid-cap S&P 400 Index showed relative weakness and closed 0.7% lower. The major indices again closed near the middle of their intraday ranges, indicating a indecision amongst traders.

Total volume in the NYSE rose by 2% yesterday’s, while volume in the Nasdaq came in 5% above the previous day’s level. The S&P and Nasdaq losses on higher volume technically made yesterday a bearish “distribution day,” but the broad market’s losses were small and the increase in turnover was minimal. Declining volume exceeded advancing volume in both exchanges, but only by a small margin. The rally in the final hour helped to close the spread on the bearish market internals from mid-day.

Because institutions account for approximately two-thirds of the stock market’s average daily volume, it is important to know what institutional traders are doing so that you can trade in the same direction. The best way to do so is by regularly following the broad market’s volume patterns, as volume is the footprint of institutional activity. Volume is also the one technical indicator that never lies! Studying the volume pattern of the past week, the action has been interesting.

On January 19, the S&P 500 gained on higher volume, making it an “accumulation day”. But on January 20th, the S&P 500 registered a “distribution day” by falling nearly 2% on its highest volume in nearly a year. The S&P bounced modestly the following day, January 23, but on lighter volume. On the 24th, the S&P had a small gain “accumulation day,” but posted another bearish “distribution day” on January 25th. Putting it all together, there have been two “accumulation days” and two “distribution days” within the past five sessions. On the surface, this indicates institutional indecision, but both “distribution days” have been on higher volume than the “accumulation days”, especially on January 20. Looking solely at volume patterns, the scales are tipped to the bearish side in the short-term. Bearish daily chart patterns confirm what the volume is telling us.

Performance within the specific industry sectors was rather mixed yesterday. On the downside, the Oil and Utilities sectors posted the largest losses. The Oil Service Index ($OSX) fell 2.8%, its largest loss in months. However, a correction of that magnitude is not surprising given the sector’s parabolic gains over the past year. Conversely, Gold continued its upward march. The $GOX index zoomed 2.3% higher and finished at a new all-time high, as did GLD, the ETF that mirrors the price of the Spot Gold commodity. Note, however, that GLD also registered its highest volume day ever, which could be a sign of short-term exhaustion:

The huge volume spike at the top may indicate that GLD (and Spot Gold) needs to take a rest, but we noticed an interesting divergence yesterday; Spot Silver and the silver-related shares have suddenly begun to show relative strength and are now ready to break out to new highs. There is not an ETF that specifically tracks the Silver stocks, but you may consider building your own “synthetic ETF” by simultaneously trading a basket of silver stocks. PAAS, AEM, and SSRI are three silver stocks that are each poised for breakouts (notice the high volume in each one yesterday).

In yesterday’s Wagner Daily, we illustrated how both the S&P 500 and Nasdaq Composite had formed “bear flag” patterns on their daily charts and were poised for follow-through to the downside. The S&P did indeed trade below its pivotal 50-day moving average, but the index again finished the day just above it. It was the fourth consecutive day the S&P closed just above its 50-day MA, which has been acting like a magnet. The longer the index stays glued to its 50-day MA, the more powerful the move will be when it resolves itself in one direction or the other. We still feel the eventual resolution will be to the downside, but be prepared with tight stops if it is not because the move could be fast and furious. The same goes for the Nasdaq, which also is clinging to its 50-day MA.

Today’s Watchlist:

Because the model account is near its maximum buying power, there are no new ETF setups for today. Instead, we will focus on managing our three open positions below.

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):

stop 14.75

unrealized P/L = + $0

SPY short (350 shares from Jan. 25 entry) –
shorted 126.36, stop 127.37, target 121.95, unrealized points = (0.30), unrealized P/L = ($105)

RTH short (400 shares from Jan. 23 entry) –
shorted 94.76, stop 96.25, target 89.80, unrealized points = (0.41), unrealized P/L = ($164)

Closed positions (since last report):

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

$97,699

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