The Wagner Daily | December 13, 2006

Commentary:

Stocks trended lower ahead of yesterday afternoon’s decision on interest rates, but a subsequent lack of any surprises from the Fed enabled the broad market to recover off its lows. Still, each of the major indices closed in the red. Both the S&P 500 and Dow Jones Industrial Average lost 0.1%, but the Nasdaq Composite showed relative weakness by falling 0.5%. The S&P Midcap 400 Index also slid 0.5%, while the small-cap Russell 2000 declined 0.6%. The S&P and Dow finished in the upper third of their intraday ranges, but the Nasdaq closed just below the middle of its range. The price divergence between the major indices confirms what we illustrated in yesterday’s newsletter, regarding the Nasdaq showing more relative weakness than the S&P 500.

Turnover rose across the board yesterday, causing the Nasdaq to register a bearish “distribution day.” The minor loss in the S&P was not significant enough to confirm institutional selling. Total volume in the NYSE swelled 17% above the previous day’s level, while the Nasdaq volume increased by 6%. Despite the “distribution day” in the Nasdaq, the NYSE volume remained below its 50-day average level for the seventh consecutive session. In the Nasdaq, it was the third day of higher volume selling within the past four weeks. It’s normal to expect occasional bouts of institutional selling in a healthy market, but caution is required when the count exceeds more than three “distribution days” within a month. A concentrated analysis of the market’s daily price to volume ratios enables one to see what is happening “under the hood” rather than merely assessing the obvious price action. We discuss changes in the market’s volume on a daily basis because volume spikes are the h
allmark of professional buying on the “up” days, and selling by hedge funds, mutual funds, and other institutions on the “down” days.

While most industry sectors closed in the red, the Banking Index ($BKX) reacted favorably to yesterday afternoon’s Fed announcement. The $BKX followed through on Monday’s breakout to a new record high, which we illustrated in the December 12 issue of The Wagner Daily. The DJ Utilities Index ($DJU) also built on the previous day’s gain. Conversely, the Dow Jones Transportation Average ($DJT) was among the weakest sectors yesterday. The $DJT not only lost 1.2%, but it also broke a key support level and is now positioned for further downside. As for ETFs, the iShares Transportation (IYT) has a nearly identical chart pattern as the $DJT index. As you can see on the chart below, IYT is in the process of following through on a bearish “head and shoulders” chart pattern:

Not only did IYT break down below support of its ascending neckline yesterday, but the selloff also coincided with a break below the 50-day MA. From here, we should expect IYT to at least drop to support of its 200-day MA within the next several days. However, the projected price target from the top of the head down to the neckline puts IYT at a downside price target of just below the $81 level. We sent an intraday e-mail alert to subscribers yesterday, informing them we were initiating a new short position in IYT after it broke below its 50-day MA. The U.S. Oil Fund (USO) failed to follow through on its “bull flag” chart pattern, so we stopped out of it yesterday. But the new IYT position is already showing a small profit and looks promising. The UltraShort QQQQ ProShares (QID) also moved in our favor yesterday.

Today’s Watchlist:

There are no new setups in the pre-market today, although we entered a new short position in IYT yesterday (per intraday e-mail alert).

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 = + $168

QID long (350 shares from Dec. 7 entry) –
bought 52.83, stop 51.08, target 56.20, unrealized points = + 0.29, unrealized P/L = + $102

Closed positions (since last report):

unrealized P/L = ($684)

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

$52,204

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