Keep a close eye on this sector

The broad market traded in a tight
and narrow sideways range throughout most of
the session, but a selloff during the final hour caused the major indices to
close modestly lower. The S&P 500
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dropped 0.5%, but the Dow Jones Industrials
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small-cap Russell 2000
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0.3%. The major indices all closed near their intraday lows, typically a sign of
institutional selling. One marginal positive that could be derived out of
yesterday’s session is that turnover in the NYSE declined by 2%. Total volume in
the Nasdaq was unchanged from the prior day. Another "distribution day" in the
current week would have caused major pressure in stocks entering next month. But
even without further losses on higher volume, the technical damage to the daily
charts is already occurring.

In the December 28 issue of The Wagner Daily, we
analyzed the daily chart of the Oil Service index
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potential short in OIH (Oil Service HOLDR). If you went through with shorting
OIH at that time, the trade appears to be working out fine so far. The Oil
Service index bounced slightly on Wednesday, but sold off and closed near the
December 27 low yesterday. Looking at the daily chart of OIH below, notice how
OIH is very close to breaking horizontal price support around the $128 level (as
marked by the blue horizontal line):

Because it is consolidating near the lows of its recent range
after breaking its daily uptrend line three days ago, we now expect the Oil
Service Index to break its horizontal support level within the next one to days.
If it does, our first downside target on corresponding OIH would be the 50-day
moving average, presently at $123.63. Beyond that, we could mark the high of the
subsequent bounce and trail a stop to maximize gains and protect profit.

The S&P 500 closed yesterday below its December 27 low, and
hence formed a "lower low" on the daily chart that coincides with this week’s
"lower high." With the S&P still trading above its 50-day MA, it is too early to
confirm a reversal of the intermediate-term uptrend, but bulls should definitely
be cautious here:

Finally, keep a close eye on the Semiconductor Index ($SOX) in
the coming days, as it closed yesterday at key support of its recent
consolidation. A confirmed close below the 481 level in the $SOX could trigger a
wave of selling that would send the $SOX at least down to its 50-day MA:

Like last Friday, December 23, we expect today’s volume to be
among the lightest levels of the year. As mentioned on numerous recent
occasions, lower than average volume often leads to erratic and choppy behavior.
But the good news is that the holiday season will have passed when things get
rolling again next week. At that point, we will see the true intentions of
institutional activity and can easily position ourselves on the correct side of
the market if we are mostly cash going into next week. We remain short IWM,
which is looking pretty good, and will begin entering new ETF positions next
week as well.

Open ETF positions: