The Wagner Daily


The major indices chopped around in a narrow, sideways range before finishing the day mixed and near unchanged levels. As we have become accustomed to in recent months, small and mid-cap stocks showed the most relative strength in the broad market. Both the Russell 2000 and S&P 400 indices gained 0.5%. But despite strength in small caps, the Nasdaq Composite finished 0.2% lower. The S&P 500 eked out a 0.1% gain and the Dow Jones Industrial Average was flat. Most of the major indices finished near the middle of their intraday ranges, indicating institutional complacency into the close.

Further confirming the idea that institutions were indifferent about yesterday’s action was the broad market’s low volume levels. Total volume in the NYSE declined by 15%, while volume in the Nasdaq was 20% lighter than the previous day’s level. The fourth straight drop in NYSE turnover caused volume to come in below its 50-day average level for the first time this year. Volume in the Nasdaq was lighter than its 50-day average in only one other session this year (January 17). Because the major indices closed near unchanged levels and off of their intraday highs or lows, yesterday’s light turnover does not tell us much. The only thing we can be certain of is that institutions have not been active in the markets over the past several days. Pay close attention to the direction of stocks on the broad market’s next volume spike, as that should clearly indicate the intentions of the institutional traders. This, of course, is important because institutional activity accounts for more than half of the market’s average daily volume. As such, the market is typically led by institutional buying and selling activity as opposed to activity by retail investors and traders.

Although the major indices showed little action yesterday, a handful of industry sectors made significant moves. The Gold Index ($GOX) quickly rebounded from the previous day’s correction, gaining 3% and closing only 1% below its all-time high that was set last week. However, tight stops should be kept in place to protect your profit if still long GLD (Gold Trust), as the ETF has not even traded below its 10-day moving average since December 23. GLD is showing incredible relative strength this year, but a normal correction along the way is to be expected.

The Oil Service sector ($OSX) similarly bounced 2.9% yesterday, but we still like the sector on the short side as long as it does not rally above its January 23 high. As you may recall from yesterday’s Wagner Daily, that high marks the top of the left shoulder on the sector’s current “head and shoulders” chart pattern. The right shoulder on the hourly chart of OIH (Oil Service HOLDR) has now formed perfectly, so it should head lower from here, back down to the neckline. However, we will be sure to cover quickly if the pattern fails to follow through to the downside because failed “head and shoulders” patterns often reverse sharply. The hourly chart of OIH below illustrates this:

Other sectors that made substantial moves yesterday were Semiconductors ($SOX), which bounced off its 20-day moving average and gained 2.2%, and the PowerShares Halter China Index ($HXC), which surged 2.8% and closed less than 2% off its record high. As we have discussed on numerous occasions since the beginning of the year, the stocks and ETFs that are tied to mainland China have been on fire! FXI, the ETF that mirrors the Xinhua China 25 Index, is up 15% this year. PGJ, the PowerShares ETF China Fund, is similarly 14% showing a year-to-date gain of 14%. We profited from a substantial part of this move with our long position in PGJ last month. CHN, technically a closed-end investment fund, but diversified like an ETF, is showing a whopping 32% year-to-date gain. The chart below illustrates the year-to-date percentage gains of these three funds:

The great thing about international ETFs such as FXI is that foreign markets often trade independently of the U.S. markets. A good example of this is that FXI is up 15% this year, while both SPY and QQQQ are up only 1%. If you have an IRA account in which you are not able to sell short, international ETFs may provide you with alternative long-term investment options in times when the U.S. markets are chopping sideways or trending lower. The iShares family of ETFs has the largest selection of international ETFs, which can be viewed on the iShares web site.

As for the broad market, the technical picture has not really changed since yesterday’s analysis. 1,261 remains key support of the prior low on the S&P 500. A break below that should generate substantial downward momentum. Upside resistance is in the range of 1,269 (50-day MA) all the way up to 1,277 (20-day MA). For the Nasdaq Composite, 2,247 is a pivotal support level, while resistance is from 2,266 up to 2,291. Overall, we remain moderately biased to the short side in the short-term — except, of course, for the Chinese stocks and ETFs.

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):

      XLU short (700 shares from Feb. 2 entry) –
      shorted 32.03, stop 32.59, target 30.15, unrealized points = + 0.18, unrealized P/L = + $126

      SPY short (400 shares from Feb. 3 entry) –
      shorted 126.58, stop 128.05, target 122.60, unrealized points = (0.02), unrealized P/L = ($8)

      OIH short (100 shares from Feb. 3 entry) –
      shorted 150.10, stop 156.20, target 137.80, unrealized points = (3.59) unrealized P/L = ($359)

    Closed positions (since last report):


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



      Per intraday e-mail alert, we raised the stop on OIH yesterday.

    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