The Wagner Daily | December 19, 2006

Commentary:

For the second consecutive day, the stock market gapped higher on the open, then promptly turned tail and headed south. But this time, each of the major indices finished in the red. Significant divergence occurred between the growth-oriented small cap stocks and the blue chips. The Russell 2000 Index fell 1.4%, but the Dow Jones Industrial Average lost less than 0.1%. The S&P Midcap 400 slid 1.0%, the Nasdaq Composite 0.9%, and the S&P 500 0.3%. Like the previous session, each of the major market indices closed near their intraday lows.

Total volume in the NYSE declined by 29%, while volume in the Nasdaq came in 21% lighter than the previous day’s level. The lower turnover enabled both the S&P and Nasdaq to dodge a bearish “distribution day,” but remember that the previous day’s volume levels were skewed higher by the “quadruple witching” options expiration. Market internals began the day in positive territory, but steadily deteriorated throughout the session. Declining volume in the NYSE exceeded advancing volume by a margin of just under 2 to 1. The Nasdaq ratio was negative by 2.7 to 1.

Looking at the industry sectors, the energy stocks were among the biggest losers yesterday. The Oil Service Index ($OSX) plummeted 3.9%, dragging the Oil Service HOLDR (OIH) with it. Only two days after breaking out above the high of its two-week consolidation, OIH failed the breakout and actually closed at the low of its prior range. Obviously, this is very bearish action, so we are no longer bullish on the oil and oil service sectors. If you kept your protective stop in OIH just below support at the 148.50 area, as we initially suggested, your loss from the failed breakout would have been minimal. If, however, you did not yet cut your loss, consider selling into strength of any bounce in today’s session.

The mining stocks also showed relative weakness yesterday, causing the Gold and Silver Index ($XAU) to slide 1.6%. However, the recent correction in the spot gold commodity has caused the StreetTRACKS Gold Trust (GLD) to fall to support of the confluence of its 50 and 200-day moving averages:

As you can see, GLD closed at a very pivotal support level. Most of the time, an index or stock will at least attempt to bounce off the first test of its 200-day moving average support. When combined with support of the 50-day moving average at the same level, the odds are even higher that GLD at least bounces in the near term. Not only is it sitting on support of its 50 and 200-day moving averages, but it also closed at support of its uptrend line from the October low. Although we have been stalking the Market Vectors Gold Miners (GDX) for potential long entry, GLD may provide a more clear entry point at its current level. A continuation of the bullish trend in the Euro/Dollar (and FXE) will also help GLD. We like these kind of long entries because the risk/reward ratio is so high. If the convergence of support holds firm, as we anticipate it will, the upside profit potential is quite substantial. But if it trades more than a few cents below yesterday’s low, you can quickly sell the position for a minimal loss. The potential reward is much higher than the risk, which is what we mean by a positive risk/reward ratio.

In yesterday’s newsletter, we discussed how the S&P and Dow have been holding near their highs, but the Nasdaq, Russell 2000, and S&P Midcap 400 indices are stuck at resistance of their prior highs. Yesterday’s relative weakness in the latter three indices was further confirmation of the major divergence that is taking place. The jury is still out on how long the S&P and Dow will remain at their six-year highs, but it’s becoming increasingly likely that the Nasdaq, Russell, and S&P Midcap indices will soon fall to at least test support of their 50-day moving averages. Not only are these market leading indexes beginning to roll over, but leading stocks such as Google and Apple Computer have also begun to break down. If leadership by the top growth stocks continues to fade, the broad market will be hard pressed to move to the upside. For that reason, we have shifted our overall short-term market bias to the bearish side and the intermediate-term bias to neutral. Proceed with extreme caution on any new long entries, especially those that are correlated to the Nasdaq.

Today’s Watchlist:

GLD – StreetTRACKS Gold Trust
Long

Trigger = above 61.23 (over yesterday’s high)
Target = 64.40 (test of December 1 high)
Stop = 60.36 (below yesterday’s low)
Shares = 400

Notes = See the commentary above for an explanation of the setup.

MZZ – UltraShort Midcap400 ProShares
Long

Trigger = above 63.06 (over yesterday’s high)
Target = 66.65 (just below 76.4% Fibonacci retracement of last move down)
Stop = 61.28 (below the 10-day MA)
Shares = 350

Notes = This ETF is inversely correlated to the direction of the S&P Midcap 400 Index, and at a leveraged ratio of 2 to 1. As discussed, the S&P Midcap 400 may be reversing its short-term trend, so we are looking to capitalize on such action. A move below yesterday’s low in the S&P Midcap 400 will represent a break of its primary uptrend line and the setting of a “lower low.”

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 = + $336

QID long (350 shares from Dec. 7 entry) –
bought 52.83, stop 50.78, target 56.20, unrealized points = (0.11), unrealized P/L = ($38)

Closed positions (since last report):

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

$51,896

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