The Wagner Daily | November 17, 2006

Commentary:

The major indices scored their fifth consecutive day of gains yesterday, as stocks drifted sideways to modestly higher throughout the session. The S&P 500 gained 0.2%, the Nasdaq Composite 0.3%, and the Dow Jones Industrial Average 0.4%. Small and mid-cap stocks took a break from their recent patterns of relative strength. The Russell 2000 Index slipped 0.2%, while the S&P Midcap 400 was unchanged. Though the S&P and Nasdaq secured another higher close, it was merely a consolidation day. The broad-based indices digested the prior day’s gains by trading within their respective ranges of the previous day.

Turnover softened in both exchanges yesterday, breaking the Nasdaq’s string of bullish “accumulation days” over the past week. In the NYSE, total volume was 1% lighter than the previous day’s level, while volume in the Nasdaq declined by 4%. Market internals were positive by only a narrow margin, especially in the Nasdaq where advancing volume exceeded declining volume by only 1.1 to 1. The NYSE ratio was positive by 3 to 2.

Remember what we said yesterday morning about seeing positive money flow and sector rotation into the commodity-related ETFs? Scratch that! Although starting the day on a positive note, the U.S. Oil Fund (USO) plummeted 3.6% and finished at a historical low yesterday. The StreetTRACKS Gold Trust (GLD) lost “only” 0.9%, but it was trading higher by nearly the same percentage before it began to sell off late in the morning. Not surprisingly, this had a very negative effect on the corresponding sector indices as well. Of the major industry sectors we monitor on a daily basis, the worst performer yesterday was the CBOE Gold Index ($GOX), which suffered a 4.0% loss. Trailing closely behind with a 3.7% loss was the Oil Service Index ($OSX). The drop in the price of crude oil and the oil service stocks was similar, but the spot gold commodity showed relative strength by losing much less than the individual gold stocks.

Minor price retracements within the context of an uptrend are normal, but yesterday’s weakness in the commodities, especially oil, was clearly the result of institutional distribution. Ironically, the heavy selling hit the commodities just as we started to become pretty bullish on the sector. As you might have guessed, the bearish commodities action made for a challenging day. Three of our five open positions stopped out within several hours of one another. The DB Commodity Index (DBC), which we bought when it broke out on November 6, stopped us out after rapidly collapsing below support of its primary uptrend line. USO, which we re-entered on November 15 after attempting a bullish reversal, stopped us out as well. Fortunately, however, our protective stop was placed tightly below the November 14 low. After stopping us out at mid-day, USO lost 2.4% more in the afternoon, a prime example of the importance of honoring your stops. The iShares Cohen & Steers Realty Majors (ICF), our only short sale of the five open positions we had, was the third ETF that hit our stop yesterday. GLD is still showing a solid profit and is above our stop, but it demonstrated bearish action by failing to hold above yesterday morning’s break of its hourly downtrend line. The PowerShares WilderHill Clean Energy (PBW) retraced a bit, but is still above our entry point.

If you’re new to our daily commentary, this is where you may be expecting me to shed light on the situation by defending our positions and explaining on a technical level exactly why we had such a tough day yesterday. But long-time readers know that we always report the facts rather than spinning a bunch of fluff or hype. The basic fact is that we were just plain wrong! As always, we obviously had valid technical reasons for entering each of our ETF trades, but they simply didn’t work out. Learning to take full responsibility for both your winning and losing trades, rather than blaming external influences, is a critical element of becoming a consistently profitable professional trader.

On the long side, the Semiconductor Index ($SOX) has become one of the best looking sectors for potential entry. It has been consolidating nicely since breaking out above its 200-day MA three days ago, so we like the idea of buying the Semiconductor ETFs on a decent pullback. That being said, however, we must confess that the market has begun fooling us over the past several days. Numerous sectors we expected to show strength have suddenly started to exhibit relative weakness, and vice versa. A good example is how the strength in the commodities completely disappeared, while the Real Estate Index ($DJR) has retraced 75% of its loss from last week’s breakdown below its uptrend line. There are other instances as well. For that reason, we have shifted into SOH (“sitting on hands”) mode, a conservative overall trading approach reserved for situations like this that occur several times per year. For the time being, we are totally content with merely managing our remaining positions, but sitting on the sidelines with regard to new trade entries. When most of the industry sectors stare following through again, we will be ready to attack, but cash is king until the waters look safer.

Today’s Watchlist:

There are no new trade setups for today, as we are in “SOH mode.” However, we will send an intraday e-mail alert if any outstanding setups present themselves.

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 = + $441

PBW long (700 shares from Nov. 15 entry) –
bought 18.11, stop 17.14, target 20.15, unrealized points = + 0.04, unrealized P/L = + $28

Closed positions (since last report):

net P/L = ($413)

USO long (400 shares from November 15 re-entry) –
bought 53.04, sold 51.82, points = (1.22), net P/L = ($496)

ICF short (250 shares from November 7 entry) –
sold short 94.23, covered 97.16, points = (2.93), net P/L = ($738)

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

$31,098

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