Stocks wrapped up last week with little fanfare, as the major indices recovered from morning weakness to finish with mixed results. Both the S&P 500 and Nasdaq Composite managed to close 0.1% higher, but the Dow Jones Industrial Average took a breather and finished 0.1% lower. Considering the Dow was showing a 0.6% loss after the first thirty minutes of trading, the index continued to show pretty good resiliency. The small-cap Russell 2000 and S&P Midcap 400 indices each fell 0.7%, although both indices outperformed the S&P and Nasdaq the previous day. Overall, last Friday’s session showed surprisingly low volatility for an options expiration day.
Total volume in the NYSE increased by 1% yesterday, but volume in the Nasdaq was 5% lower than the previous day’s level. Curiously, it was the second day in a row that the S&P gained 0.1% on a 1% increase in volume. The Nasdaq also closed marginally higher, but on decreasing volume, for the second consecutive day. Turnover in both exchanges remained above average levels. Despite the small gains in the S&P and Nasdaq, market internals were negative in both exchanges. In the NYSE, declining volume exceeded advancing volume by a margin of 1.3 to 1. The Nasaq ratio was only fractionally negative.
Most industry sectors closed last Friday within one percent of unchanged levels, so only a few sectors stood out. On the upside, the Airline Index ($XAL) gained 3.1% and was the biggest industry gainer on our daily watchlist. Because the sector is so small, there are not any ETFs that specifically track the airline stocks. The Telecom ($XTC) and Pharmaceutical ($DRG) indices, both in steady uptrends and at their 52-week highs, moved higher with gains of 0.9% and 0.7% respectively.
The Semiconductor Index ($SOX), which was at a “make it or break it” level going into Friday’s session, was little changed. The $SOX moved 0.4% lower, but is still right in the vicinity of its pivotal 50-day moving average. The October 19 low of 444 is critical support, as a break below that level would confirm a break of both its 50-day moving average and its prior low of October 3. When we last looked at the daily chart of the $SOX, we focused only on the 50-day moving average, but the prior low is key support of a five-week consolidation period as well. The dashed horizontal line on the chart below represents support of that October 3 low:
On the downside, a drop in the price of crude oil last Friday put pressure on our recent entry in the Oil Service HOLDR (OIH), but it is still holding in the upper half of its recent range and is well above our stop. As always, we are taking a “set it and forget it” attitude about our protective stop, which is just below the 20-day moving average. After you have identified a quality trade setup, determined a logical stop price, and set a general price target, setting a mechanical stop (adjusted per the MTG Opening Gap Rules when necessary) removes the anxiety from the trade. The trade will either be a winner or loser, but worrying about the outcome of any individual trade causes you to miss other opportunities that arise right in front of your face.
One sector ETF that has come onto our radar screen for potential long entry is the StreetTRACKS Gold Trust (GLD). After gaining a whopping 75% from July of 2005 through May of 2006, GLD entered a corrective phase. Since peaking in May, it has corrected as much as 24%, but GLD is now poised to break resistance of its five-month downtrend line and resume its weekly uptrend. Interestingly, three major resistance levels have now converged just overhead the current price of GLD: the 50-day MA, 200-day MA, and five-month downtrend line. We have circled this area of triple confluence on the daily chart below:
Obviously, this triple convergence is indeed a major resistance level and long entries should not be attempted until GLD breaks out above the 59.80 area. However, we feel GLD will test that level and try to breakout within the coming days. The recent “undercut” of the mid-September lows that occurred in the beginning of October is bullish because it likely washed out all the remaining “weak hands.” Often, an “undercut” of a prior low is necessary in order for a downtrending stock or ETF to reverse its trend. We also like that volume has been steadily declining over the past month, another sign that the sellers are drying up. Again, it is too risky to buy GLD before it actually breaks out above its “triple trouble” resistance, but the upside momentum that results from such a breakout should be rather substantial. GLD has now been added to our watchlist for potential entry, so regular subscribers should note the trigger, stop, and target prices below.
The broad market was relatively quiet last week, but it held up well, only correcting off its recent highs by a small percentage. The major indices have been in a tight range over the past several days, so look for a volatility expansion very soon. The primary trend would favor an upward breakout out of the range, but on the other hand, the S&P and Nasdaq still remain near the upper channels of their uptrend lines. We continue to maintain a neutral to bearish near-term bias, but are bullish on the intermediate-term trends. Don’t forget that quarterly earnings season is in full swing. The deluge of earnings reports continues this week, as Texas Instruments (TXN) and Amgen (AMGN) are among the notable companies reporting after today’s close. As always, remember to trade what you see, not what you think!
GLD – StreetTRACKS Gold Trust
Trigger = above 59.89 (over the triple convergence of resistance)
Target = 63.80 (probe above the Sept. 5 high)
Stop = 58.05 (below the 20-day MA)
Shares = 350
Notes = This setup was originally e-mailed as an intraday trade alert last Friday, but it did not yet trigger. There are slight adjustments to the trigger price and share size, but the setup is the same. Detailed explanation of the setup is in the commentary above.
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):
KCE short (400 shares from October 17 entry) –
sold short 63.72 (avg.), stop 65.17, target 59.68, unrealized points = + 0.38, unrealized P/L = + $152
OIH long (150 shares from October 19 entry) –
bought 131.65, stop 126.58, target 142.30, unrealized points = (1.65), unrealized P/L = ($248)
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
Neither the GLD long nor DXD short setups sent by intraday e-mail alert triggered last Friday. As you can see, we are still stalking GLD for potential long entry today. We are cancelling the DXD setup for now, but be on alert for a potential entry via e-mail alert. We first want to assess broad market conditions before listing any new trade entries in the broad-based ETFs.
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Click here to view MTG’s past performance results (updated monthly).
Edited by Deron Wagner,
MTG Founder and