Commentary:

Following through on the previous day’s accumulation, stocks scored a solid round of gains yesterday. The major indices opened sharply higher, trended north throughout most of the day, then pulled back in the final two hours of trading. By day’s end, the broad market had closed slightly higher than its opening price, but well into positive territory. The Nasdaq Composite climbed 1.5%, as the Dow Jones Industrial Average and the S&P 500 both gained 1.2%. The small-cap Russell 2000 and S&P Midcap 400 indices advanced 1.7% and 1.5% respectively. All the main stock market indexes finished around the upper quarter of their intraday ranges.

Turnover was mixed. Total volume in the NYSE eased 15%, but trading in the Nasdaq was 7% greater than the previous day’s level. The higher volume gain in the Nasdaq enabled the index to score its second straight “accumulation day.” However, volume in the Nasdaq was still slightly below its 50-day average level. In both exchanges, market internals were solid. In the NYSE and Nasdaq, advancing volume exceeded declining volume by a margin of approximately 4 to 1.

On its daily chart, the Semiconductor HOLDR (SMH) has been stuck in a very choppy trading range over the past four months. However, a look at the longer-term weekly chart smoothes out the noise, and reflects a consolidation that has the potential of significant upside if it follows through on a breakout. The weekly chart of SMH is shown below:

The dashed horizontal line marks the significant area of horizontal price resistance that has been in place since August of this year. If SMH rallies above that level, over the $26.50 area, it has the potential to make another leg up this time around. But if buying SMH on a breakout above that level, one might consider a relatively tight stop, just below the breakout level, because of the high chance of another false breakout.

Yesterday, iShares Nasdaq Biotech (IBB), which we pointed out as a buy setup in yesterday’s newsletter, broke out above resistance of its 50-day MA and 5-month downtrend line. As per our plan, we bought IBB on the breakout. Although it closed with an unrealized gain, we’ll be watching for confirmation of the breakout, which would come on a move above the “swing high” from mid-November. This is shown on the daily chart of IBB below:

The Japanese Nikkei Index finally woke up, causing iShares Japanese Index Fund (EWJ) to surge 4% higher yesterday. Trading in the international ETF also jumped to three times its average daily level, pointing to accumulation amongst mutual funds, hedge funds, and other institutions. EWJ has also broken out above resistance of its 3-month downtrend line. Though it formerly was showing relative weakness to the U.S. markets, we may be seeing the early signs of institutional rotation into EWJ. We’ll be monitoring its price action for potential buy entry, for a “swing trade,” on a pullback to the area of its 20-period exponential moving average on the hourly chart (20-EMA/60 min). The sudden breakout in EWJ is shown below:

In yesterday’s commentary, we pointed out a potential short setup in Oil Service HOLDR (OIH), which had recently broken support of its 50-day moving average and 5-month uptrend line. Along with nearly everything else, OIH moved higher yesterday, but the ETF ran into resistance of its 50-day moving average and prior uptrend line, causing it to stall and close near its low of the day. As such, OIH now provides an attractive reward-risk ratio for potential short entry below yesterday’s low. The setup is illustrated on the daily chart below:

Despite yesterday’s solid gains in the broad market, the S&P 500 remains stuck in the trading range discussed in yesterday’s commentary. In the S&P 500, the high of yesterday’s session was just one point shy of the upper channel resistance of its three-week range, but the index ran into a bit of selling pressure as it approached that level. Because of the trading range condition, we must now be prepared for the possibility of a few down days that take the index down towards lower channel support, at the 1,083 area. Of course, a convincing gap above the high of the range, on today’s open, could quickly make history of the recent range-bound channel. But unless that happens, it’s good to stay alert and not get complacent on the long side of the market.

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Today’s Watchlist:

Oil Service HOLDR (OIH)
Short

Shares = 100
Trigger = 119.25 (below yesterday’s low)
Stop = 123.20 (beyond 61.8% Fibonacci retracement of the recent downward move)
Target = 110.60 (support of the October 2 low)
Dividend Date = approx. January 5, 2010

Notes = See commentary above for explanation of the setup.

In addition to the OIH short setup, we’ll also be monitoring SMH for a potential breakout entry, as well as EWJ for possible pullback entry. If either trade is entered, we’ll promptly send an Intraday Trade Alert with details.

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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. Please review the Wagner Daily Subscriber Guide for important, automatic rules on trigger and stop prices.

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Notes:

• Per Intraday Trade Alert, we sold the rest of our DAG position for a scratch.
• The IBB setup, listed in yesterday’s Wagner Daily, triggered for buy entry. As with all our recent positions, initial risk is limited to approx. $300, about half our typical risk per trade.
• Reminder to subscribers – Intraday Trade Alerts to your e-mail and/or mobile phone are normally only sent to indicate a CHANGE to the pre-market plan that is detailed in each morning’s Wagner Daily. We sometimes send a courtesy alert just to confirm action that was already detailed in the pre-market newsletter, but this is not always the case. If no alert is received to the contrary, one should always assume we’re honoring all stops and trigger prices listed in each morning’s Wagner Daily. But whenever CHANGES to the pre-market stops or trigger prices are necessary, alerts are sent on an AS-NEEDED basis. Just a reminder of the purpose of Intraday Trade Alerts.
• For those of you whose ISPs occasionally deliver your e-mail with a delay, make sure you’re signed up to receive our free text message alerts sent to your mobile phone. This provides a great way to have redundancy on all Intraday Trade Alerts. Send your request to support@morpheustrading.com if not already set up for this value-added feature we provide to subscribers.

Edited by Deron Wagner,
MTG Founder and
Head Trader