The Wagner Daily | November 27, 2006

Commentary:

The stock market began last Friday’s post-holiday session with a large opening gap down, but recovered a portion of those losses later in the morning before closing at 1:00 pm EST. The Nasdaq Composite again exhibited relative strength by closing only 0.2% lower compared to the 0.4% loss in the S&P 500. Intraday action also confirmed the price divergence, as the Nasdaq briefly recovered into positive territory two hours after the open, but the S&P showed a loss throughout the entire day. Like the S&P 500, the Dow Jones Industrial Average also fell 0.4%, but both the small-cap Russell 2000 and S&P Midcap 400 indices gave up only 0.1%.

With the stock market concluding three hours early, turnover obviously declined sharply in both exchanges. In the NYSE, total volume was 61% lower than the previous day’s level. Volume in the Nasdaq declined by 58%. Adjusted for the early closing time, volume in the NYSE was still 36% lighter than the previous day at 1:00 pm EST. The Nasdaq volume was on pace to be 29% lower. The minimal number of shares that traded hands means that Friday’s price action was not confirmed due to the absence of institutional trading activity. Beneath the surface, however, market internals were negative. In the Nasdaq, declining volume exceeded advancing volume by a margin of 2 to 1. The ratio in the NYSE was negative by 1.2 to 1.

Not surprisingly, most industry sectors closed within 1% of unchanged in Friday’s shortened session. But to our satisfaction, gold was the one exception. A $10 per ounce overnight jump in the price of the spot gold commodity caused our long position in the StreetTRACKS Gold Trust (GLD) to correspondingly rally 1.6% and finish at its highest level since August 9. Individual gold mining stocks performed even better than spot gold, as the CBOE Gold Index ($GOX) zoomed 2.6% higher. In the November 22 issue of The Wagner Daily, we illustrated a weekly chart of GLD and mentioned that we soon expect a breakout above the three-week range. This breakout came on Friday, as you can see on the daily chart below:

Since our initial entry one month ago, GLD is showing an unrealized gain of more than 8%, but we remain long because the ETF has not yet given us a good reason to sell. Many new traders mistakenly think that a high percentage of accuracy on your stock or ETF picks is necessary in order to be consistently profitable, but this is not true. On average, we make a profit on only about 40 – 50% of our trades, BUT the dollar gain of our average winner is usually close to double the loss of the average loser. While simple math dictates that such statistics will result in a long-term winning strategy, the key point is that net profitability can only occur from maximizing profits on the winners and being disciplined with stop losses on the losers. Though we set price targets on our trades, they are only to be used as a guideline. If a position is acting very well, we will sometimes raise our target because there is no reason to sell. However, we always trail an increasi
ngly tightening stop in order to protect profits just in case the stock or ETF surprises us. With GLD, our new price target is just below resistance of the August 2006 high of 65.22. We plan to sell into strength as GLD approaches that level because it is a logical resistance level at which it will likely take a break and at least correct by time before moving much higher.

Spot silver has been showing even more relative strength than gold, and don’t forget that the iShares Silver Trust (SLV) is a great way to participate in a corresponding move in the silver commodity. Check out last Friday’s breakout:

In addition to its bullish technical pattern, major weakness in the U.S. dollar is one reason gold has been doing well. As you may recall, we began following the bullish chart pattern in the CurrencyShares Euro Trust (FXE) just before it broke out on November 22. That day, FXE gained 0.8%, then followed up the move with another 1.1% gain on November 24. Unfortunately, it has been difficult to directly profit from the breakout because both days’ gains have been the result of large opening gaps, not intraday strength. Because we have clearly defined rules regarding opening gaps, the MTG Opening Gap Rules, the only way we could have profited from the FXE strength is to have bought the consolidation before it actually broke out. But buying consolidations without waiting for confirmation of the breakout carries a much higher risk. Regardless, the strength in FXE has been impressive and
we like the idea of buying the first pullback to near support of the breakout level. As the weekly chart below illustrates, a pullback to just below the $130 level would provide an ideal entry point if not already long:

In addition to gold, we are watching for a potential breakout above the sideways range of the Semiconductor Index ($SOX). Since rallying above its 200-day MA and weekly downtrend line on November 14, the $SOX has been consolidating in a narrow range that may serve as a base from which to make another leg up. However, the only thing that makes us a little bit reluctant to aggressively buy a $SOX breakout is that the major indices remain extended pretty far away from support of the lower channels of their uptrend lines. Even though the $SOX looks good, the sector may be out of sync with the broad market because its rally came in the late stages of the broad market’s rally. If the market begins to correct, the $SOX may have a tough time holding up. Nevertheless, there’s no major risk in buying a breakout in the Semiconductor HOLDR (SMH), the iShares Semiconductor (IGW), or any of the others, but you might consider reducing your position size and keeping a tighter than usu
al stop in order to minimize your risk in the event of a failed breakout.

Finally, be on the lookout for a breakout in crude oil and/or the various oil-related ETFs. We recently pointed out the bullish setup in the Oil Service HOLDR (OIH), and we continue to feel it will break out sometime within the next few days. We already bought OIH when it crossed above its 200-day MA last Friday, but it drifted lower into the close. Still, it finished near the pivot on its fifth attempt to close above the 200-day MA, so it should go soon. If interested in an ETF that loosely mirrors the price of the actual crude oil commodity, the U.S. Oil Fund (USO) is the one to watch, but it’s still glued to its low and therefore carries higher risk of a bottom not yet being firmly established.

Today’s Watchlist:

DXD – UltraShort Dow 30 ProShares
Long

Trigger = above 59.36 (over last Friday’s high)
Target = 61.80 (just below the 50-day MA)
Stop = 57.89 (below the Nov. 22 low)
Shares = 400

Notes = We are looking to play a short-term correction in the Dow Jones Industrials if it breaks support of its recent volatility contraction. The consolidation in the Dow Jones Industrials may be failing, and this index is now showing the most relative weakness of the major indices. We’ve been stalking this ETF for entry over the past few days, but we still like it for potential entry. Note the adjusted share size and new trigger price, which is over last Friday’s high. Remember that buying DXD is the same as selling short DIA, but with better leverage and can be done in a cash, non-marginable account.

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 61.78

unrealized P/L = + $1,098

PBW long (700 shares from Nov. 15 entry) –
bought 18.11, stop 17.14, target 20.15, unrealized points = (0.03), unrealized P/L = ($21)

OIH long (200 shares from Nov. 24 entry) –
bought 141.21, stop 137.60, target 149.10, unrealized points = (0.91), unrealized P/L = ($182)

Closed positions (since last report):

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

$59,766

Notes:

MTG Opening Gap Rules

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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