The Wagner Daily | December 15, 2006

Commentary:

Stocks surged higher out of the starting gate yesterday morning, racking up sizeable gains within the first thirty minutes of trading. The major indices subsequently drifted sideways to higher throughout the rest of the session before finishing in the upper third of their intraday ranges. Both the S&P 500 and Nasdaq Composite gained 0.9%, while the Dow Jones Industrial Average and S&P Midcap 400 indices each rallied 0.8%. The small-cap Russell 2000 was higher by 0.7%. Yesterday’s strength enabled both the S&P and Dow to close at fresh six-year highs, but the Nasdaq is still trading below its prior high that was set last month. The Russell 2000 and S&P Midcap 400 indices also remain just below their prior highs.

Volume was higher across the board, confirming yesterday’s gains. Total volume in the NYSE increased by 7%, while volume in the Nasdaq was 6% higher than the previous day’s level. The gains on higher volume enabled both the S&P and Nasdaq to register bullish “accumulation days,” the first such day in the NYSE since December 5. The NYSE volume also rose above its 50-day average level for the first time in nine trading days. As one would expect, market internals were firmly positive. In the NYSE, advancing volume exceeded declining volume by a margin of 3.5 to 1. The Nasdaq adv/dec volume ratio finished positive by 3 to 1, but dwindling buying interest throughout the day caused the ratio to fall from its morning high of more than 8 to 1.

In yesterday’s newsletter, we explained how the Semiconductor Index ($SOX) was at a critical “make it or break it” level of its 50 and 200-day moving average convergence. The bulls immediately scooped up shares of semiconductor stocks on yesterday’s open, enabling the $SOX to close 1.9% higher. If not for the strength in the $SOX, yesterday’s broad-based gains would have been difficult to achieve. The $SOX held support of its 50 and 200-day moving averages, but now it is back in “no man’s land,” stuck in its previous one-month range of choppy and directionless price action.

In addition to the $SOX, the Oil Service Index ($OSX) was a strong performer yesterday. The 1.3% gain in the $OSX enabled the Oil Service HOLDR (OIH) to convincingly break out above the high of its multi-week consolidation that we pointed out yesterday. If you bought OIH on a breakout above its December 8 high of 148.47, you are already sitting on a gain of more than 1.5 points as of the close. As always, the prior resistance at the 148.50 area should now act as support on any pullback. Therefore, you might consider trailing your stop to just below the prior high in order to protect against an immediate failed breakout.

In the November 21 issue of The Wagner Daily, we initially pointed out the bullish setup in the CurrencyShares Euro Trust (FXE). It broke out sharply the following day, closing at a new all-time high, then trended steadily higher through December 1. Unfortunately, much of the gain from the FXE breakout was the result of overnight opening gaps as opposed to intraday trends. We planned to buy the initial breakout on November 22, but we passed it by because the sharp opening gap negatively skewed our risk/reward ratio on the trade. Since peaking on December 1, we have been patiently stalking FXE, waiting for a decent price correction that would provide a second chance to buy it. We believe that time may be coming soon. Take a look at the daily chart of FXE:

As you can see, FXE dropped down to support of its 20-day moving average yesterday. In strongly trending stocks and ETFs, a retracement down to the 20-day MA often marks the low of a correction before the equity heads back up to its high. However, it is important to wait for confirmation of support before stepping up to the plate. In this case, the “safest” entry point is when FXE trades above the previous day’s high. If that occurs today, we could buy over yesterday’s high, but we will continue to wait patiently if FXE fails to move above yesterday’s high.

The Market Vectors Gold Miners (GDX) is another ETF that is setting up for a low-risk entry on the long side. Unlike the StreetTRACKS Gold Trust (GLD), which mirrors the price of the spot gold commodity, GDX is tied to the price movement of a basket of gold mining stocks. In this latest rally, the mining stocks have shown more relative strength than the commodity itself, so we think GDX is a better bet than GLD if considering gold. On the chart below, notice how GDX has been trending steadily higher since the beginning of October and has corrected down to and bounced off support of its 20-day MA. Again, waiting for an entry over yesterday’s high is ideal because it would help to confirm that a short-term bottom has been formed:

Despite having flashed several hints of a possible top over the past week, we were not shocked that the S&P 500 broke out to a new six-year high yesterday. On a basic technical level, its consolidation at the high has been tight and narrow over the past week and a half, so the odds favored an eventual breakout above the range. With a lack of overhead supply from prior highs, it never takes a lot of buying pressure for an index trading at a 52-week high to move further upwards. How long it holds above that range is anybody’s guess, but at least it moved out of the range. The market clearly remains resilient, but the only thing that concerns us is the continued relative weakness in the Nasdaq 100 and the Russell 2000. If those indexes catch up to the S&P by moving to new highs, we’ll feel much more comfortable on the long side of the market, but the range-bound $SOX is no good. As always, remember to trade what you see, not what you think!

Today’s Watchlist:

Per the above commentary, we are stalking both FXE and GDX for potential long entries, but want to observe their intraday price action before buying them. Rather than listing the parameters in the pre-market, we will send an e-mail alert with trade details if/when we enter either 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):

unrealized P/L = ($20)

QID long (350 shares from Dec. 7 entry) –
bought 52.83, stop 51.08, target 56.20, unrealized points = (0.92), unrealized P/L = ($322)

Closed positions (since last report):

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

$51,968

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