Here’s what would make me bullish on gold

After beginning the day with an
opening gap up, stocks trended higher
throughout Wednesday morning’s session, but the bears once again showed up in
the afternoon and caused the broad market to give back most of its earlier
gains. The major indices each finished in the bottom third of their intraday
ranges, but closed in positive territory nevertheless. The S&P 500
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Dow Jones Industrials
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advanced 0.4%. The small-cap Russell 2000 Index rebounded 1.0% from its 2.6%
loss that had accumulated in the four days prior. The mid-cap S&P 400, which had
also been displaying relative weakness, bounced 0.7%.

Total volume in the NYSE rose by 5% yesterday, but turnover in
the Nasdaq was 4% lighter than the previous day’s level. This means that the S&P
technically registered a bullish "accumulation day" because the index closed
higher and on higher volume. However, it was not positive that it finished near
its intraday low. Overall volume in both exchanges has come in below 50-day
average levels in each of the past three sessions and is likely to continue
declining until after the New Year’s Day holiday. With lower turnover comes thin
markets. Thin markets, in turn, usually lead to erratic and choppy moves within
the major indices. This is one of the reasons we have been recommending you take
it easy with entering new positions until after the holidays have passed.

Major industry sectors that turned in the strongest
performances yesterday were: Gold + 2.6%, Transportation + 2.3%, and
Biotechnology + 1.9%. On the downside, Utilities fell 1.2% and the
Semiconductors lost 0.3%. Most of the other industries we follow posted minor
gains. As most of you know, we netted solid profits from strength in both the
Gold ETF
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through the beginning of December, at which point we sold into strength in
anticipation of a correction. Since peaking on December 12, we have been
stalking both GLD and several individual mining stocks for potential re-entry on
the long side. So far, the $GOX sector has been acting well by consolidating in
a narrow, sideways range near its highs. As the chart below illustrates,
yesterday’s gain in the $GOX was prompted by the index coming into support of
its 20-day moving average. It also is holding above its primary daily uptrend
line:

If the $GOX trades sideways for another week or two instead of
rapidly breaking out to a new high, it would be rather bullish in the big
picture. Such price action would enable a more solid base of support to be
formed. A lack of overhead supply would subsequently make it easy for the $GOX
to break out. However, because the market is likely to become thin until the
holidays have passed, we are skeptical about trusting a breakout to new highs in
the $GOX, or any other index, during the next week and a half. Still, it is wise
to have a watchlist of strong sectors so that you immediately know which ETFs
and stocks to consider buying after the holidays have passed. Gold is definitely
one such sector that should be on your watchlist because the $GOX index is
consolidating near its all-time high. As discussed in yesterday’s newsletter,
the Pharmaceutical Index (and
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The closely-watched Semiconductor Index
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at a pivotal level that will determine its direction over the next several
weeks. Take a look:

As the blue horizontal line illustrates, the $SOX is holding
above support of its prior highs from September and November, but it has also
begun to consolidate near the low of its three-week trading range and is below
its prior uptrend line. This means the sector is showing us mixed signals and
could easily snap in either direction. Therefore, we recommend avoiding this
sector until the technical picture becomes more clear. Remember also that the
Nasdaq tends to follow the $SOX. As such, an indecisive and choppy $SOX could
lead to the Nasdaq behaving in a similar manner.

As always, we will be providing the usual technical analysis
and market commentary during the holiday period, but entering new positions at
this time is not advisable. Overtrading is easy to do in a light volume
environment, and it only leads to churning your trading account. If you are
currently flat, relax and take some time off. The market will certainly be here
when you are ready to return, and remaining in cash during this time period is
likely to save you money. If, however, you are already in positions that you
like, simply set your good-til-canceled (GTC) stop orders and cruise into the
end of the year as well.

Note that the U.S. equities markets will be closed on
Monday, December 26. As such, The Wagner Daily
will not be published that day, but regular publication will resume on December
27. Happy Holidays to you and your family!

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