The Wagner Daily | January 3, 2006

Commentary:

After trading in a narrow, sideways range throughout the session, the broad market wrapped up 2005 with another day of moderate losses last Friday. The bulls attempted to stage a rally with forty-five minutes remaining, but a wave of sellers in the final fifteen minutes caused the S&P to finish near its intraday low. The S&P 500 lost 0.5%, while both the Nasdaq Composite and Dow Jones Industrial Average fell 0.6%. The mid-cap S&P 400 Index also shed 0.6%, while the small-cap Russell 2000 lost 0.7%. The drop in the Russell helped our short position in IWM, which is now showing a marked-to-market gain of just under one point. Action in individual sectors, however, was quite uneventful. Nearly every major industry sector we follow closed within 1% of unchanged. Both the Gold Index ($GOX) and Dow Jones Transports ($DJT) corrected 1.1%.

Total volume in the NYSE increased by 7% last Friday, while turnover in the Nasdaq was 11% higher than the previous day’s level. The losses on higher volume technically caused another bearish “distribution day” to register on both exchanges, but volume levels still remained below average. Nevertheless, it was at least the fourth day of institutional selling with in the past four weeks. Market internals were negative throughout the entire session, but really worsened during the final fifteen minutes of trading. In the NYSE, declining volume outpaced advancing volume by a margin of 5 to 2. The ratio in the Nasdaq was negative by nearly 3 to 1.

For the year, the S&P 500 gained 3% and the Nasdaq eked out a 1.4% gain, but the Dow Jones again showed relative weakness by losing 0.6%. During this same period, all ETF trades from The Wagner Daily resulted in a net gain of more than 20%. Since inception more than three years ago, we are pleased to say that officially tracked trades from The Wagner Daily have continued to consistently outperform the major market indices.

If you picked up any financial paper over the weekend, you undoubtedly read an extensive market recap of the year 2005. We won’t be redundant by doing the same. Instead, we will kick off 2006 by taking a look at the big picture of what we might expect in the coming year, rather than dwelling on what has already become ancient history. To do this, we need to look at the long-term monthly charts of the major indices in order to determine the primary market trends. Let’s start with the broad-based S&P 500 Index:

As you can see on the chart above, the S&P spent the entire year in a relatively narrow, sideways range. The low of 1,136 was set in April, while the intra-year high of 1,275 was set in December. The index finished near at 1,248, only 2% below its highest level of the year. Most importantly, however, is that the S&P closed just below its 61.8% Fibonacci retracement level from the year 2000 high down to its 2002 low. The 61.8% Fibonacci retracement level is significant because it typically represents the last major level of resistance before an index reverses its primary trend (a downtrend in this case). Therefore, we are going to go out on a limb by stating that 2006 is likely to be a volatile year because the S&P is at a major “make it or break it” level that will result in the index making a big move in one direction or the other. If unable to rally firmly above its 61.8% Fibo retracement, a resumption of the primary downtrend from 2000 through 2002 is likely to occur. However, a confirmed breakout above the 2005 high could easily result in a strong rally and gradual climb back to the year 2000 high. Obviously, we cannot forecast which of these scenarios will occur, but it does seem likely that it will be a volatile year. Volatility, of course, is great for short-term traders.

Looking at the monthly chart of the Nasdaq Composite, you will notice that it followed nearly the same pattern as the S&P throughout last year:

Similar to the S&P, the Nasdaq marked its lowest level in April and highest level in December before finishing 3% off its intra-year high. But one major difference is that the Nasdaq has recovered only 25% of its loss from 2000 through 2002. While the S&P 500 is deciding whether or not to break out above its 61.8% Fibonacci retracement, the Nasdaq has not even rallied back to its first major line of resistance at the 38.2% Fibo retracement. Over the past several years, the Nasdaq has been showing relative weakness to the S&P because the insane gains from the “dot com” boom of the late 90’s can not be regained easily. In the coming year, the lack of convergence between the S&P and Nasdaq surely will not assist the S&P in breaking out.

In the short-term, caution is advised on both sides of the market. Stocks turned in a weak performance during the final two weeks of 2005 and a handful of “distribution days” during that time pointed to institutional selling. In the final week of 2005 alone, the S&P 500 lost 1.6%, while both the Nasdaq and Russell fell nearly 2%. However, it is important to remember that volume levels have been lower than average throughout the holiday season, just as they always are. Therefore, we should not read too much into the market’s recent performance until we begin to see the real intentions of traders when institutions begin returning to the scene this week. The Nasdaq Composite and many leading stocks have corrected down to support of their 50-day moving averages for the first time in months. When this occurs, institutions typically begin buying the sectors and stocks with the most relative strength. The recent bearish action, combined with the fact that many indices and stocks are at key support levels, means that the broad market is showing mixed signals. Trading action often becomes whippy and violent during such conditions, so take it easy over the next several days. We intend to resume active trading operations as volume returns to the markets, but we plan to ramp it up gradually. Consider doing the same if you respect risk.

Today’s Watchlist:

OIH – Oil Service HOLDR
Short

Trigger = below 126.37 (below the Dec. 30 low)
Target = 117.10 (just above 61.8% Fibo retracement from Oct. low to Dec. high)
Stop = 130.79 (above the Dec. 30 high)
Shares = 200

Notes = As discussed in last week’s commentary, the Oil Service Index ($OSX) has broken support of its primary uptrend from the October low. Since breaking that uptrend on December 27, the index has been consolidating near the low of its range and unable to recover. We expect this consolidation to lead to new lows and a possible break of the 50-day MA in the coming week. Note that share size on OIH is small due to its high volatility.

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):

stop 68.20

unrealized P/L = + $255

Closed positions (since last report):

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

$20,016

Notes:

Click
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