Index Opportunities Setting Up

The major indices meandered in a
tight, sideways range throughout the entire day before finishing with minor
losses. The S&P 500 ticked 0.1% lower, the Dow Jones Industrial
Average slipped 0.2%, and the Nasdaq Composite lost 0.3%. The small-cap Russell
2000 and S&P Midcap 400 indices declined by 0.2% and 0.1% respectively. The
narrow, five-point intraday range of the S&P 500, as well as the correspondingly
insignificant ranges of the other indices, did little to change the technical
picture of the broad market. Overall, it was just a quiet and uneventful session
in which stocks paused to digest their recent gains.

Turnover was marginally lower across the board. Total volume
in the NYSE was 1% lighter than the previous day’s level, while volume in the
Nasdaq declined by 2%. It was the first day since the abbreviated, post-holiday
session on November 24 that volume in the Nasdaq was below its 50-day average
level. In the NYSE, it was the third straight session in which less shares than
average changed hands. Market internals were negative, but not by a wide margin.
In both exchanges, declining volume exceeded advancing volume by a ratio of
approximately 5 to 4.

One sector we are watching in the coming days is the Oil
Service Index ($OSX). On November 30, we sold our long position in the Oil
Service HOLDR
(
OIH |
Quote |
Chart |
News |
PowerRating) into strength, near its intraday high. Though we netted
a substantial profit on the trade, we have continued to monitor the sector’s
price consolidation over the past week because we feel the sector may be setting
up for further upside. Whether or not that happens is dependent on the ability
of the index to break out above pivotal resistance at the 213 level. Looking at
the weekly chart below, notice how the 213 level corresponds with horizontal
price resistance from both July and August of this year (circled in blue):

Based on decent chart patterns of the individual stocks that
comprise the $OSX, we think the index is indeed capable of making another leg
higher. However, it could easily require another one to two weeks of
consolidation, as a “correction by time,” in order to build up enough momentum
to break out firmly above the 213 resistance level. This expectation is the
reason we locked in the gain on our OIH position last week rather than holding
it through weeks of consolidation. Although we are no longer positioned in OIH,
a bullish pattern in the price of the crude oil commodity prompted us to buy the
U.S. Oil Fund (USO) two days ago.

On November 27, the Crude Oil Continuous Contract (@CL) popped
firmly back above its 50-day moving average for the first time since mid-August
of this year. It trended steadily higher in the four days that followed, then
began a modest correction on December 4. Its downward retracement over the past
four days has resulted in the formation of a “bull flag” pattern on the daily
chart of both crude oil and USO. The low of the “bull flag” pattern which
occurred on December 5 also corresponded with a test of support around the 61.40
to 61.50 area. We have drawn the “bull flag” pattern with orange lines on the
daily chart of crude oil below. The blue ellipses illustrate how USO tested new
support of its prior highs at the 61.40 to 61.50 area:

Although not shown,
(
USO |
Quote |
Chart |
News |
PowerRating) has a similar chart pattern to
the crude oil contract shown above. We expect USO to break out from its “bull
flag” pattern within the next several days. We stopped out of USO when we bought
it near the beginning of last month, but our entry at the time was more
anticipatory because it lacked the confirmation of a “bull flag” above the
50-day MA. We still are in “sitting on hands” mode (SOH), but the good thing
about USO is that it is not directly correlated to the direction of the stock
market.

Open ETF positions:

Long USO, short RKH (regular subscribers to

The Wagner Daily receive detailed stop and target prices on open
positions and detailed setup information on new ETF trade entry prices. Intraday
e-mail alerts are also sent as needed.)