The Wagner Daily | December 14, 2006

Commentary:

The broad market gapped up sharply yesterday morning, but the excitement faded quickly as traders digested the previous day’s Fed commentary on interest rates. After the first hour of trading, the major indices had fallen down to unchanged levels. Though such a failure of an opening gap often leads to further losses later in the session, stocks entered into a choppy, sideways range instead. The tug-of-war between the bulls and bears lasted throughout the rest of the day before the major market indices finished mostly flat. The Nasdaq Composite, Dow Jones Industrial Average, and small-cap Russell 2000 Index each were unchanged, while the S&P 500 and S&P Midcap 400 indices both gained 0.1%.

Total volume in the NYSE eased by 4%, while volume in the Nasdaq was 7% lower than the previous day’s level. Although volume in the NYSE came in below its 50-day average level for the eighth straight day, turnover is not likely to pick up significantly until after the holiday season. Like the stock market’s price action, internals were also choppy intraday, but finished marginally positive. In both the NYSE and Nasdaq, advancing volume exceeded declining volume by a ratio of 1.1 to 1.

The Oil Service HOLDR (OIH), which we pointed out in the December 11 issue of The Wagner Daily, broke out above the high of its two-week consolidation early yesterday afternoon, but failed to close above it. It didn’t have enough relative strength to sustain the move into the close, but it may attempt to break out again today. If it does, it could present a decent short-term trading opportunity that is not closely correlated to the broad market. The December 8 high of 148.47 is the pivotal resistance level from the consolidation:

The major focus of many traders today will be the price action of the Semiconductor Index ($SOX). After trading in a range for the past several weeks, this integral part of the Nasdaq closed right at support of both its 50 and 200-day moving averages. As you can see on the chart below, the $SOX bounced off support of its 200-day MA on December 1, so all eyes will be watching to see whether or not this pivotal moving average does its thing again:

When the $SOX bounced off its low on December 1, it was primarily because of the 200-day moving average. But this time, there is convergence of the 50-day MA as well. This makes the area of support even more important. If the market is still healthy, the $SOX should once again rally off support. But a break of the 50 and 200-day MA convergence would be pretty bearish. Failure of the $SOX to hold above yesterday’s close would likely have a detrimental effect on the Nasdaq, which often leads the S&P and Dow. With the $SOX trading so close to this pivotal level, be prepared for trading opportunities in the Semiconductor ETFs such as the Semiconductor HOLDR (SMH), iShares Semiconductor (IGW), and the PowerShares Semiconductor (PSI). The only question is which side of the market to be on. As always, our goal is not to predict, but to have a solid game plan in advance so that we can profit from whichever direction the $SOX wants to go.

As for the broad market, not much has changed on a technical level over the past few days. The S&P and Dow are continuing to consolidate at six-year highs, while the Nasdaq is showing more relative weakness by trading below its November high. The broad market has begun displaying signs that it may be getting tired, but we do NOT yet have any confirmation that a top has been formed. More and more, it is beginning to look like the major indices will correct by time, rather than price. If this is the case, it means we can look forward to a few more weeks of range-bound chop. Perhaps it’s a good time to simply enjoy the holiday season with family and friends and step away from the market until it resolves itself in one direction or the other.

Today’s Watchlist:

There are no new setups in the pre-market today. As always, we will send an intraday e-mail alert if/when we enter any new positions.

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 = + $340

QID long (350 shares from Dec. 7 entry) –
bought 52.83, stop 51.08, target 56.20, unrealized points = + 0.14, unrealized P/L = + $49

Closed positions (since last report):

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

$51,980

Notes:

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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