The Wagner Daily | December 28, 2006

Commentary:

The stock market followed through on Tuesday’s bullish reversal by posting a round of solid gains on higher volume yesterday. Both the S&P 500 and Nasdaq Composite rallied 0.7%, while the Dow Jones Industrial Average gained 0.8%. Small caps perked up, enabling the Russell 2000 Index to advance 1.2%. The S&P Midcap 400 was 0.9% higher. Each of the major indices finished near their intraday highs, though the Nasdaq Composite displayed relative weakness in its intraday chart pattern. The S&P and Dow closed firmly above their respective morning highs, but the Nasdaq barely exceeded resistance of its morning high. Bearish divergence in the Nasdaq has been the situation for the past several weeks.

The most positive thing about yesterday’s session is that the gains occurred on higher volume, but turnover in both exchanges was still well below average levels. In the NYSE, total volume was 23% higher than the previous day’s level. The Nasdaq volume similarly increased by 19%. Although the gains on higher volume technically caused both the S&P and Nasdaq to register bullish “accumulation days,” volume in both exchanges was still approximately 35% lighter than 50-day average levels. With institutions remaining largely on the sidelines, don’t get too excited about price movements in either direction during this holiday week. Again, we will know the true intentions of which way the mutual funds, hedge funds, and other institutional traders want to take the market after New Year’s Day has passed.

Although we are already showing a profit with our long position in the StreetTRACKS Gold Trust (GLD), the Market Vectors Gold Miners (GDX) is also setting up for a potential long entry. While GLD mirrors the price of the spot gold commodity, GDX is tied to the price movement of a basket of individual gold mining stocks. As you may recall, we bought GLD on December 19 when it corrected down to triple convergence of support of its primary uptrend line, 50-day MA, and 200-day MA. So far, its primary uptrend remains intact. The price of spot gold obviously affects the price of the mining stocks, but the two do not necessarily move in sync with one another all the time. GDX bounced off support of its 50-day MA two days ago, and closed yesterday right at resistance of its three-week downtrend line. If GDX rallies above yesterday’s high, it should resume its primary uptrend that began with the low of October 5. This is illustrated on the chart below:

Curiously, we continue to see a clear divergence between the relative strength in the blue chip Dow Jones Industrial Average and the tech-heavy Nasdaq Composite Index. Yesterday, the Dow actually closed at a fresh six-year high, but the Nasdaq merely ran into resistance of its 20-day moving average and finished in the middle of a six-week sideways range. Further, the Dow only corrected down to support of its 20-day MA, but the Nasdaq dipped below its 50-day MA. Looking at the daily charts below, notice how the Dow has no overhead supply to contend with. The Nasdaq, however, could easily roll back over to test its 50-day MA and December 26 low:

Although not shown, the S&P 500 has a similar chart pattern as the Dow. The S&P only corrected down to its 20-day MA and nearly closed at a new high yesterday as well. When the major indices are showing such divergent patterns, it indicates the presence of a tug-of-war between the bulls and bears that typically leads to indecisive and choppy overall conditions. While it’s certainly possible for the S&P and Dow to continue rallying with the Nasdaq lagging behind, rallies driven by such leadership are usually short-lived. Soon, we should see the resolution of either the Nasdaq catching up and moving to new highs, or the S&P and Dow correcting down to the vicinity of the Nasdaq. A healthy Nasdaq is necessary in order to confirm the strength in the S&P and Dow, so traders will be watching the coming week closely to see which scenario occurs first.

Today’s Watchlist:

We are targeting GDX for potential long entry today, but are NOT listing a trigger price in the pre-market. Instead, we want to assess overall volume and market conditions before making a decision. If we do buy GDX, we will promptly send an intraday e-mail alert with trigger, stop, and target prices.

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):

See important notes below regarding this position

unrealized P/L = + $571

GLD long (400 shares from Dec. 19 entry) –
bought 61.25, stop 60.36, target 64.40, unrealized points = + 0.97, unrealized P/L = + $388

MZZ long (250 shares from Dec. 19 entry) – See important notes below regarding this position
bought 63.46, stop 60.14 (dividend adjusted), target 65.51 (dividend adjusted), unrealized points = (1.24), unrealized P/L = ($310)

Closed positions (since last report):

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

$58,998

Notes:

We sent an intraday e-mail alert that we were targeting GDX for potential long entry, but it did not hit our trigger price. For now, that GDX setup alert has been canceled, but we will send another alert with new parameters if/when we decide to buy it today.

Regarding QID and MZZ, both traded “ex-dividend” on December 20. As such, their prices were adjusted lower to account for the dividend payment that will be made to shareholders on December 27. The net result is no change in the overall profit or loss of the position, but stop and target prices had to be adjusted lower by the exact amount of the dividend distributions. For QID, an additional gain of $0.567 per share will be included in the performance reporting after the position is closed, while both the stop and target prices have also been lowered by this amount. For MZZ, the adjustment was $1.14 per share. Note that the “Unrealized points” and “unrealized P/L” figures already account for the dividend distributions that will be made. New guidelines will soon be put into place to simplify future occurrences of dividend and/or capital gain distributions for ETF positions. See the December 21 issue of The Wagner Daily for a thorough discussion of ETF dividend distributions.

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Edited by Deron Wagner,
MTG Founder and
Head Trader