The Wagner Daily | December 11, 2006

Commentary:

The broad market concluded last week with a choppy session of indecision that left the major indices modestly higher. Stocks shook off morning weakness by rallying into mid-day, but subsequently drifted lower throughout the afternoon. By day’s end, both the S&P 500 and Dow Jones Industrial Average had advanced 0.2%, while the Nasdaq Composite gained 0.4%. Small and mid-cap stocks showed relative weakness, holding both the Russell 2000 and S&P Midcap 400 indices to unchanged levels. Each of the major indices finished just above the middle of their intraday ranges.

Overall volume levels failed to confirm Friday’s reversal attempt, as turnover fell in both exchanges. In the NYSE, total volume declined by 6%, while volume in the Nasdaq was 13% lower than the previous day’s level. If volume in the Nasdaq would have risen, it would have largely invalidated last Thursday’s bearish “distribution day,” but the index only recovered half of that day’s loss and did so on lower volume. Conversely, it’s been more difficult to determine what’s happening beneath the surface in the NYSE because turnover has been declining on both up and down days. In each of the past five trading days, total volume in the NYSE has come in below its 50-day average level. One thing for certain is that trends can reverse much more easily when in a period of declining overall volume levels.

The Nasdaq is attempting to reverse its uptrend by forming a “lower high” and “lower low,” but the S&P still remains above its pivot and near its six-year high. Rather than predicting which index will win the tug-of-war, let’s take a look at a few sector-specific ETFs that may offer short-term trading opportunities in the coming week. First is the potential upside breakout that is setting up in the PowerShares Pharmaceuticals (PJP):

As you can see, PJP has been consolidating in a sideways range for the past month. Throughout that period, it has pulled back after running the 18.40 area on four separate occasions, thereby creating a clear resistance level. Each subsequent test of resistance increases the odds of an eventual breakout, but also builds more upward momentum if the breakout eventually comes. As such, one might consider buy stopping PJP about 10 cents over the horizontal price resistance. If doing so, be sure to place a protective stop just below the 20-day moving average at 18.16 (or even tighter) in order to protect against a false breakout. Note that PJP has a much more bullish pattern than the more well-known Pharmaceutical HOLDR (PPH). The iShares Pharmaceutical (IHE) has a similar horizontal band of resistance as PJP, but its recent trading range has been much looser.

We also continue to like the bullish consolidation in the Oil Service HOLDR (OIH), which has been trading in a narrow, sideways range since breaking out eight sessions ago. Watch for a breakout above the $148.50 area:

On the downside, the ETFs with the weakest chart patterns are generally in the technology arena. We’re avoiding the semiconductor ETFs because the $SOX index has been very choppy and erratic lately, but the Software Index ($GSO) may be setting up on the short side. Specifically, the iShares Software Index (IGV) closed last week below its 50-day moving average for the first time since July 25. Looking at the chart below, notice how Friday’s reversal attempt failed, causing IGV to finish near the previous day’s low. We have also illustrated the trend channel for the short-term downtrend that has become established. If the Nasdaq heads south this week, except IGV and the other software ETFs to be among the downside leaders:

Expect trading to be relatively subdued ahead of tomorrow’s FOMC meeting on interest rates. At 2:15 pm EST, the Feds will announce whether or not they will make any changes to the Federal Funds Rate. As always, most institutional traders are likely to remain on the sidelines until after the announcement. With regard to the broad market, we shifted out of “sitting on hands” mode to “dip a toe in the water” on the short side on December 7, but we do not yet have enough confirmation to aggressively start entering additional broad-based ETFs. Perhaps resolution of the market’s mixed signals will come after tomorrow’s Fed announcement, so be prepared for a sharp move in either direction.

Today’s Watchlist:

There are no new setups for today. We first want to see the reaction to tomorrow’s FOMC meeting before initiating any new trade entries.

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 = + $32

USO long (300 shares from Dec. 5 entry) –
bought 54.60, stop 52.54, target 58.90, unrealized points = (1.02), unrealized P/L = ($306)

RKH short (200 shares from Nov. 30 and Dec. 1 entries) –
sold short 155.21 (avg.), stop 157.88, target 150.80, unrealized points = (1.82), unrealized P/L = ($364)

Closed positions (since last report):

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

$66,002

Notes:

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Click here to view MTG’s past performance results (updated monthly).

Edited by Deron Wagner,
MTG Founder and
Head Trader