The Wagner Daily | February 6, 2006

Commentary:

Stocks followed through on the previous day’s weakness last Friday, causing the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average to each fall below their 50-day moving averages. The Nasdaq dropped 0.8% and again showed the most relative weakness. Both the S&P 500 and Dow Jones Industrials slid 0.5%, while the small-cap Russell 2000 and mid-cap S&P 400 indices each lost only 0.3%. Each of the major indices again closed near their intraday lows, but most of the day’s losses resulted from an opening gap down as opposed to an intraday downtrend.

Despite the S&P and Nasdaq both closing below key support of their 50-day moving averages, it is interesting to note that turnover again declined in both exchanges. Total volume in the NYSE declined by 4%, while volume in the Nasdaq was 2% lighter than the previous day’s level. It was the third consecutive day of lighter volume in the NYSE, which is actually a positive considering that the index fell 1.4% over the last two days. The Nasdaq, however, registered a bearish “distribution day” with its 1.3% drop on February 2. Not surprisingly, market internals were negative again. Declining volume exceeded advancing volume by a ratio of nearly 3 to 1 in the Nasdaq and just under 2 to 1 in the NYSE.

As subscribers were notified via a real-time e-mail alert, we shorted OIH (Oil Service HOLDR) last Friday afternoon. The biggest reason for this trade is that the price of Crude Oil has formed a “lower high” on its weekly chart, while its last breakout on the daily chart failed to hold. This tells us that we are likely to see further correction in the price of Crude Oil in the intermediate-term. Note the “lower high” and failed breakout on the daily chart of the Crude Oil commodity below:

The Oil Service Index ($OSX) is largely impacted by the price of crude, but even better is that the index is in the process of forming the right shoulder of a bearish “head and shoulders” pattern on its 60-minute chart:

If the $OSX index breaks the “neckline” at the 208 level, we should see a significant drop in OIH because it mirrors the price of $OSX pretty closely. We already shorted OIH as it was forming its right shoulder on Friday, but a break below the February 2 low would confirm the setup even more.

Last week’s broad-based losses caused the S&P 500 to close below support of its 50-day moving average for the first time since November 1, 2005. As you may recall from the February 3 issue of The Wagner Daily, we felt it was negative that the S&P drifted back down to its 50-day MA only four days after it bounced off its support on January 26. As such, we anticipated further downside and a subsequent closing price below the 50-MA, which is exactly what happened last Friday:

Looking at the chart above, the horizontal dotted line illustrates pivotal support of the S&P’s prior low. If the index closes below that 1,261 level, the S&P will have formed a “lower low” that to go along with last week’s “lower high.” If this occurs, the S&P will have technically entered into a new intermediate-term downtrend, its first since last October. Obviously, the S&P could hold above support of its prior low, but overhead resistance of both the 20 and 50-day moving averages will make it difficult for the S&P to rally very far. The recent failed bounce off the 50-day MA has created a lot of overhead supply from traders and investors who expected the support to hold firm.

The daily chart pattern of the Nasdaq is very similar. Like the S&P, the Nasdaq formed a “lower high” last week and failed to hold above its 50-day moving average. The 2,247 level represents the January closing low, so a break below that level would correspondingly give the Nasdaq its first “lower low” as well. Looking at the broad market overall, we continue to feel that odds favor additional downside in the short and intermediate-term. Be sure to cut your losing positions quickly by simply honoring your stops. When the major indices are trading below their 50-day MAs, one can never assume that your winning long positions will “eventually come back” if they start to drop.

Today’s Watchlist:

There are no new setups for today, as the model account is near its maximum equity exposure. Instead, we will focus on managing the three open positions closely.

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 = + $259

SPY short (400 shares from Feb. 3 entry) –
shorted 126.58, stop 128.05, target 122.60, unrealized points = + 0.31, unrealized P/L = + $124

OIH short (100 shares from Feb. 3 entry) –
shorted 150.10, stop 154.70, target 137.80, unrealized points = + 0.51, unrealized P/L = + $51

Closed positions (since last report):

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

$87,629

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