Commentary:

The major indices closed near unchanged levels yesterday, as the broad market lethargically drifted sideways in a very tight range. Both the S&P 500 and Nasdaq Composite finished 0.1% higher, while the Dow Jones Industrial Average lost 0.1%. Action in the small and mid-cap stocks was equally dull; the Russell 2000 Index lost 0.2% and the S&P 400 gained 0.2%. The S&P 500, which traded in an extremely narrow 4-point range, finished just above its intraday low, as did the other major indices. It appeared that most traders were stepping to the sidelines ahead of today’s Fed meeting, which is expected to result in another quarter-point interest rate hike.

Total volume in both the NYSE and Nasdaq fell by 19% yesterday, causing the broad market to register its second consecutive day of lower volume gains. Obviously, it is not very positive when stocks are advancing on lighter volume, but remember there were recently two bullish “accumulation days” that followed the January 20 selloff (January 24 and 26). Furthermore, despite the decline in turnover, volume levels still came in above their 50-day average levels in both exchanges. Market internals were positive in both exchanges, although the Nasdaq looked better under the surface. Advancing volume exceeded declining volume by nearly 2 to 1 in the Nasdaq, but advancing volume only marginally exceeded declining volume in the NYSE.

A handful of industry sectors made substantial moves yesterday, ignoring the broad market’s trendless action. Of the major sectors we follow, only the Biotech Index ($BTK) lost more than 1% yesterday (1.3%). On the upside, the Oil Service ($OSX) and Oil ($XOI) sectors continued their parabolic uptrends, gaining 2.9% and 2.3% respectively. Both indexes finished at fresh all-time highs. The Gold and Silver Sector ($XAU) followed a similar pattern, advancing 2% and closing at a new record high for the fourth straight day! Within that sector, silver stocks continued to outshine their Gold counterparts. Since pointing out the potential silver stock breakouts in the January 26 issue of The Wagner Daily, Pan American Silver (PAAS) has rocketed 13% higher, Silver Standard Resources (SSRI) has rushed 10% higher, and Silver Wheaton Corp. (SLW) has exploded 21% higher. Good work to astute subscribers who formed their own “synthetic ETF” and bought those breakouts.

While many industries are near their 52-week highs and trending steadily higher, the DJ Utilities Average ($DJU) is one sector that is setting up on the short-side. Looking at its long-term weekly chart, notice how the index appears to have formed a “lower high” over the past several weeks:

If the $DJU index fails to go any higher and subsequently sets a “lower low” on its weekly chart, below the December 2005 low, it will represent a primary trend reversal. To capitalize on this relative weakness, consider selling short a break of the shorter-term daily uptrend line. Take a look at the daily chart below (moving averages removed so you can more easily see the trendline):

There are four primary ETFs that focus on the Utilities sector: UTH (Utilities HOLDR), XLU (S&P Select Utilities SPDR), IDU (iShares DJ Utilities Index), and PUI (PowerShares Utilities). Each have similar chart patterns, although XLU is the most popular of the group. Regular subscribers should note our trigger, stop, and target prices for the XLU short setup on the watchlist below.

Don’t forget that the Federal Reserve Board is meeting today and is widely expected to announce another quarter-point increase in the Fed Feds rate at 2:15 pm EST. Such a decision would be the fourteenth consecutive interest rate hike and would bring the current rate up to 4.5%. As usual, the actual wording of the announcement is irrelevant. Rather, the only thing that matters is the market’s reaction to the announcement. Expect the typical indecisive chop ahead of the afternoon Fed announcement, followed by high volatility in the final ninety minutes of trading. Because the broad market’s action after FOMC meetings is unpredicatable, use caution with entering new positions today and consider reducing your share size as well. We will take an updated look at the technical support and resistance levels in the major indices tomorrow, after the markets have had a chance to digest the Fed news. For now, keep an eye on resistance of the January 19 highs, which is where both the S&P and Nasdaq appear to be running into a bit of overhead supply.

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Today’s Watchlist:

XLU – S&P Select Utilities SPDR
Short

Trigger = below 32.02 (below daily uptrend line and Jan. 26 low)
Target = 30.15 (just above the Oct. 2005 closing low)
Stop = 32.92 (above hourly downtrend line and 10-day MA)
Shares = 700

Notes = We are looking to short a break of the daily uptrend line on XLU. A “lower high” on the weekly chart helps to confirm the short setup. See the commentary above for more details about this setup.

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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):
PGJ long (1000 shares from Jan. 19 entry) –
bought 15.30, stop 15.19, target new highs (will trail stop), unrealized points = + 0.52, unrealized P/L = + $520

Closed positions (since last report):

(none)

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

$15,820

Notes:


PGJ continues to act well, so no changes to the stop today.

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