Commodity ETFs stage comeback

Stocks gapped open higher last Friday
morning, but the bears quickly took control, causing the major indices to fall
to their previous day’s lows. A small bounce in the afternoon lifted
equities off their lows, but most of the market still closed in negative
territory. The S&P 500 lost 0.2% and the Nasdaq Composite finished 0.1% lower. A
sixth straight day of losses in the Dow Jones Industrial Average caused the
index to close back below the 12,000 level that was heavily hyped by the
financial media last month. Small and mid-cap stocks posted gains, but they also
fell more than the other indices in recent days. The Russell 2000 bounced 0.4%
and the S&P Midcap 400 edged 0.2% higher. For the week, the S&P 500 and Dow
Jones Industrials both declined 0.9%, while the Nasdaq Composite lost 0.8%.

The positive of Friday’s session is that turnover declined
across the board, indicating an absence of heavy selling by institutional
traders. In the NYSE, total volume declined by 9%. Overall volume in the Nasdaq
was 6% lighter than the previous day’s level. In both exchanges, volume dipped
below the 50-day average levels for the first time in four sessions. Market
internals were only marginally negative. Declining volume in the NYSE exceeded
advancing volume by a margin of 1.3 to 1. The Nasdaq ratio was negative by only
1.2 to 1.

The spot gold commodity continued its recent charge, rallying
more than $4 per ounce to close the regular session just below $630. Our long
position in the StreetTRACKS Gold Trust
(
GLD |
Quote |
Chart |
News |
PowerRating) has been enjoying the ride and
is now showing a marked-to-market gain of more than 8% since our initial entry
on October 25. Although it has not yet hit our initial price target, we made a
judgment call to lock in profits on half the position in Friday’s session. We
expect GLD to continue higher, but is due for a normal pullback. Rather than
holding the entire position through the pullback, we sold half of our shares
into strength for a gain of $3 per share. We have also raised the stop above
breakeven on the remaining shares, thereby removing all risk from the trade.

The Oil Service HOLDR
(
OIH |
Quote |
Chart |
News |
PowerRating) has been tricky lately, but
we’re glad we stayed with it. After bouncing off support of its 50-day MA on
November 2, OIH surged 3.3% last Friday. Oil and Gold were the top-performing
sectors that day. Within the next several days, it should test resistance of its
prior high from October 26. A breakout above that level would represent
follow-through of what has now become a bullish “cup and handle” pattern. The
Amex Natural Gas Index ($XNG) is sporting a similar pattern, but looks even
better because it is closer to its 52-week high. The index is also poised to
break out above the range of consolidation that has been in place for more than
a year. If that occurs, such a breakout would surely lead to substantial upward
momentum. Below is a weekly chart of the $XNG index:

Although there are numerous energy ETFs, there presently is
not one that specifically tracks the natural gas stocks. But when interested in
a sector that doesn’t have a corresponding ETF, you can created your own
“synthetic ETF” by simultaneously trading a small basket of leading stocks in
the sector. For the $XNG index, some ticker symbols to consider are: DVN, XTO,
APC, APA, EOG, and SWN.

As the equities market has begun correcting, we have
simultaneously been seeing sector rotation into the commodities and associated
stocks. Gold and Energy are clearly the leading sectors in the short-term, and
their leadership is likely to continue longer, especially if the broad market
correction continues. With the sudden leadership in commodities, one ETF we are
targeting for long entry is the DB Commodity Index Trust
(
DBC |
Quote |
Chart |
News |
PowerRating), which closed
Friday right at a pivotal resistance level. Take a look:

With DBC, 24.75 is the resistance level which stopped several
rally attempts last month. If it pops over that level, we plan to buy the
breakout. Regular subscribers should note our detailed trigger, stop, and target
prices below.

In the November 3 issue of
The
Wagner Daily, we suggested the likelihood of a rally attempt in the S&P
500 due to the close at its primary uptrend line. On Friday, the index attempted
to rally right out of the starting gate, but promptly reversed lower. Still, the
minimal loss in the S&P leaves it only a hair below its uptrend line. It’s
rather common for an index to close one day below a primary support level, then
rip back above it the following day. However, the overall performance in leading
stocks was rather dismal last week, especially the number of breakouts that
failed. Without strong leadership by top growth stocks, bounces in the stock
market are typically short-lived. Therefore, until the market shows its hand by
confirming the direction of its next move, we are maintaining a neutral to
slightly bearish short-term bias. Focusing on buying the industry sectors with
the most relative strength and shorting those with relative weakness is a good
way to sidestep indecision in the broad market.

Open ETF positions: