Why I’m watching the OIH

Stocks gapped higher out of the
starting gate Wednesday morning, enabling the major indices to touch new
multi-year highs, but traders immediately sold into strength. The
broad market filled its upside gap within the first forty-five minutes of
trading, but stocks subsequently drifted higher throughout the remainder of the
session. In the end, it was a day of clear price divergence. Both the Nasdaq
Composite and S&P Midcap 400 indices rallied 0.5%, but the Dow Jones Industrial
Average was unchanged. The S&P 500 and the small-cap Russell 2000 gained only
0.2% and 0.1% respectively. Strength in tech stocks helped the Nasdaq to finish
near its intraday high, but the S&P and Dow showed much less closing conviction.

As we often see ahead of a holiday, turnover was very light.
Total volume in the NYSE declined by 13%, while volume in the Nasdaq was 9%
lower than the previous day’s level. In both exchanges, it was the lightest
volume day since October 9. Volume levels in both the NYSE and Nasdaq have also
been below their 50-day average levels in each of the past three days. Astute
traders should view this week’s broad-based gains with an ounce of caution
because they have occurred on declining and minimal overall turnover. When
stocks rally on declining volume, the problem is that it only takes one day of
institutional selling to wipe out many days of gains. But so far, the bears have
pretty much remained in hibernation.

In the November 21 issue of
The
Wagner Daily, we pointed out a bullish setup and in the CurrencyShares
Euro Trust
(
FXE |
Quote |
Chart |
News |
PowerRating). Specifically, we were anticipating a break of its
downtrend, which is exactly what happened in Wednesday’s session. Here is an
updated look at its weekly chart:

Unfortunately, nearly all of Wednesday’s gain was the result
of a large opening gap. Though we planned to buy the breakout with a trigger
price above the November 10 high, the large upside gap reduced the risk-reward
of the trade. We therefore passed on this trade, but a sideways consolidation
here at the June high would allow FXE to set up for a new breakout entry to a
fresh all-time high over the 130 level.

One ETF that is likely to break out in the coming days is the
Oil Service HOLDR
(
OIH |
Quote |
Chart |
News |
PowerRating). Recently, we netted a large profit in a long
position of OIH, but our trailing stop was triggered after it ran into its
200-day moving average. Over the past four days, OIH has recovered from that
correction and is once again poised to break out above its 200-day MA. Take a
look at the chart below:

As you can see, yesterday was the fourth time this month that
OIH has touched its 200-day MA. Each subsequent tests of that resistance level
increases the likelihood of a breakout. As such, we feel odds are pretty good
that OIH will make a substantial upward move over the next week. Regular
subscribers will see our trigger, stop, and target price for the setup below.