SOX and OIH at Critical Levels

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 |
Quote |
Chart |
News |
PowerRating), 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 |
Quote |
Chart |
News |
PowerRating),
iShares Semiconductor [IGWIGW], and the PowerShares Semiconductor
(
PSI |
Quote |
Chart |
News |
PowerRating). 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.

Open ETF positions:

Long QID, short IYT (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.)

Deron Wagner is the head trader of
Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com),
which he launched in 2001. Wagner appears on his best-selling video, Sector
Trading Strategies (Marketplace Books, June 2002), and is co-author of both The
Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader
(McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and
Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and
financial conferences around the world. For a free trial to the full version of
The Wagner Daily or to learn about Deron’s other services, visit

morpheustrading.com or send an e-mail to

deron@morpheustrading.com .