Commentary:

The broad market posted modest gains yesterday, but lower turnover across the board tempered the advance. The major indices moved in a non-committal, sideways range in the first half of the day, then grinded a bit higher in the afternoon before finishing in the upper third of their intraday ranges. The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average each rallied 0.2%, while the small-cap Russell 2000 and S&P Midcap 400 indices both edged 0.1% higher.

Volume in both exchanges declined for the third straight day, enabling the S&P and Nasdaq to dodge a bearish “distribution day” last Friday, but also preventing yesterday from becoming a bullish “accumulation day.” Total volume in the NYSE declined by 9%, while volume in the Nasdaq was 8% lighter than the previous day’s level. Market internals were positive, but only by a narrow margin. Both the NYSE and Nasdaq saw advancing volume exceed declining volume by a ratio of approximately 3 to 2. Overall volume levels have been drifting lower every day since the initial surge on the first trading day of the new year, but has remained above average levels in each session. With quarterly corporate earnings season starting this week, many traders have likely taken a “wait and see” stance ahead of the plethora of reports on tap in the coming weeks.

Yesterday’s action has no substantial effect on the technical picture of the broad market. Both the Russell 2000 and S&P Midcap 400 indices remain below their 50-day MAs, a negative for the overall stock market, but tech strength is enabling the Nasdaq Composite to hold just above both its 20 and 50-day MAs. The S&P 500 and Dow Jones are basically in “no man’s land,” stuck in the middle of their recent trading ranges. Rather than rehashing the same broad market support and resistance levels we looked at in yesterday’s newsletter, let’s take a brief look at which specific industry sector ETFs are showing the most relative strength and weakness to the major indices. Buying the sectors with relative strength and/or selling short those with relative weakness is a great way to both increase your chances of profitability and decrease the odds of churning your account in this indecisive market.

Only a couple of the sector ETFs we follow are showing decent chart patterns and relative strength. The Software HOLDR (SWH), which we brought to your attention last Friday, closed right at the high of its three-month base of consolidation. Any further strength in the Nasdaq today should cause the ETF to break out to a new four-year high:

Within the technology arena, the Computer Networking sector has also been acting well, enabling the PowerShares Networking (PXQ) to break out of an eight-week base of consolidation:

As long as PXQ holds above its prior high, which is new support at the $18 level, it presents a low-risk entry on the long side. Both the Software and Computer Networking segments are showing cleaner chart patterns and more relative strength than other tech segments such as Semiconductors or Internets. The Semiconductor Index ($SOX), for example, remains a chop-fest. Given that the stock market is not exactly strong right now, “cherry picking” only the best looking setups on the long side is essential.

As for the S&P and Dow-type sectors, the only ETF we see attempting to break out to a new high is the StreetTRACKS Capital Markets (KCE), which tracks the performance of the Securities Broker-Dealer sector:

On the short-side, both the oil and oil service sectors are perhaps the weakest right now. However, the ETFs such as the Oil Service HOLDR (OIH) and S&P Select Energy SPDR (XLE) have already fallen too far to provide an ideal entry point. Instead, we are waiting for decent bounces into resistance that would provide better risk/reward ratios. We also like the recent reversal in the DJ Utilities Average ($DJU), which is reflected on the daily chart of the Utilities HOLDR (UTH) below. We may initiate a new short position in UTH on any strength:

Finally, we like the relative weakness in the iShares DJ Real Estate Index Trust (IYR), which has been unable to stay above its 50-day MA. After moving back above its 50-MA on December 27, it remained above it for only five days before rolling back over. A break below the December 22 low of 81.69 will confirm the break of the 50-MA by setting a “lower low,” while the 20-MA now acts as overhead resistance:

Though we showed you some of the ETF chart patterns we like for both long and short entry, now is NOT the time to go crazy with a bunch of new trade entries. A choppy and indecisive market is bad enough, but the upcoming slew of earnings reports could add to the market’s erratic behavior. Again, “cherry picking” and a reduction in your share size for new trade entries is prudent.

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Today’s Watchlist:

We are stalking the five ETFs above for long and short entries, but we want to assess market conditions before listing any specific trigger or stop prices in the pre-market. Be on the lookout for an intraday e-mail alert if/when we enter any new positions today.

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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):
MZZ long (250 shares from Dec. 19 entry) – See important notes below regarding this position
bought 63.46, stop 61.30 (dividend adjusted), target 65.51 (dividend adjusted), unrealized points = + 1.20, unrealized P/L = $300

SDS long (400 shares from Jan. 3 entry) – bought 58.90, stop 57.13, target 61.95, unrealized points = (0.18), unrealized P/L = ($72)

Closed positions (since last report):

(none)

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

$39,343

Notes:


Note that we have trailed the stop tighter in MZZ.

MZZ traded “ex-dividend” on December 20. As such, its price was adjusted lower to account for the dividend payment that was 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. 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.

Please check out the Wagner Daily Subscriber Guide to learn how to get the most from your subscription.

Edited by Deron Wagner,
MTG Founder and
Head Trader