The Wagner Daily | February 15, 2006

Commentary:

The Dow Jones’ recent relative strength enabled the index to break out of its range and leap 1.3% yesterday, pulling the other broad-based indices along with it. The small-cap Russell 2000 woke up and advanced 1.3% as well. Both the S&P 500 and Nasdaq Composite gained exactly 1%, while the mid-cap S&P 400 closed 0.8% higher. Due to support of the 50-day moving average, we tightened our stop in the MDY short position yesterday, which was subsequently hit later in the session. This enabled us to lock in a 2-point gain on the MDY short.

Confirming yesterday’s gains was higher volume in both exchanges. Total volume in the NYSE surged 30% higher, while volume in the Nasdaq was 10% higher than the previous day’s level. This caused both the S&P and Nasdaq to register a bullish “accumulation day” yesterday. However, despite the ten percent increase in Nasdaq volume, turnover in that exchange still came in below its 50-day average level. This is because the previous day’s volume was the lightest of the year. Market internals were positive overall, as advancing volume exceeded declining volume by a ratio of 5 to 2 in both exchanges.

Looking at individual sector action, it was interesting to note yesterday’s inverse relationship between the DJ Transportation Average ($DJT) and the Oil Service Index ($OSX). Of the major sectors we follow, $DJT was the highest percentage gainer yesterday, posting a 2.6% gain. The $DJT also closed at a fresh all-time high! Conversely, the $OSX plummeted 2.8% and was the worst performing sector. $OSX closed below its 50-day moving average for the first time since November 15, 2005. OIH (Oil Service HOLDR) followed suit and has now fully completed its predicted 7% drop from the head and shoulders pattern that we shorted on February 3. Due to support of the 50-day MA, we made the decision to cover OIH and locked in the cool 10-point profit on February 10. Still, it is interesting to see that OIH only bounced off its 50-MA for one day before following-through to the downside.

The point in comparing yesterday’s performance of the Transports and Oil Service is that you can often identify new trading opportunities by learning the inverse relationships between sectors. In this case, consider that lower crude oil prices typically enable transportation companies to be more profitable. Therefore, we saw a rise in transportation stocks while oil service stocks sold off. There are other inverse sector relationships that often go hand-in-hand as well. After you learn to spot these inverse relationships, you can find ideal trading opportunities through buying one sector ETF while shorting the other. I will be speaking more about this on June 10, at the upcoming Traders’ Expo in Ft. Lauderdale, Florida.

Of the other sector ETFs we have discussed over the past several days, FXI (Xinhua China 25 Index) broke out above its daily downtrend line yesterday and closed only 10 cents below its record high. However, we made a judgement call to not buy it yesterday because much of the gain was the result of an opening gap up. As such, our initial risk/reward ratio on the setup was negatively skewed. Ideally, we would like to see FXI trade sideways for a week or so before breaking out to new highs. If it does so, the breakout to a new high would be buyable, despite passing on the original intended entry over the downtrend line yesterday.

GLD (Gold Trust), which we analyzed yesterday, showed strength just above its 50-day MA and gained 1.3%. However, we anticipate another leg down on the daily chart before it stabilized and resumes its strong weekly uptrend. This is because it did not yet have a probe below the 50-day moving average to trigger stops and shakeout the “weak hands.” After it does, the first subsequent rally above its hourly downtrend line would be buyable.

As for the broad market, the thing that concerns us the most is that the Dow is the only major index that has a decent looking daily chart. Although the Dow closed only 15 points below its 5-year high, the S&P 500, Nasdaq Composite, Russell 2000, and S&P 400 each remain firmly below their downtrend lines that have been in place since the mid-January highs. We have illustrated resistance of these downtrend lines on the daily charts of those four indices below:

As the charts above clearly indicate, we are certainly not “out of the woods” just because of yesterday’s rally. More importantly, a lot of technical damage has been done to leading stocks and it will take them at least several weeks, and probably more, to recover. Rather than looking for new stocks and ETFs to buy, we are viewing the current bounce as a chance to sell short weak stocks and ETFs into strength. Only if the major indices begin to break out above their daily downtrend lines will our bias change.

Today’s Watchlist:

There are no new setups for today, although we are stalking a few weak ETFs for possible short entries into strength over the next several days. As always, we will send an intraday e-mail alert if/when we enter any of them.

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 32.14

unrealized P/L = + $217

Closed positions (since last report):

net P/L = + $792

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

$22,197

Notes:

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