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The Wagner Daily


Commentary:

Yesterday’s market action beared a striking resemblance to the type of patterns we have been seeing for most of this week; large pre-market gap and then a tight trading range for the rest of the day. The gap up put both the S&P and Nasdaq essentially at their highs of October 15 as soon as the market opened. If the opening gap would have held, we would have seen a new 3-day high, which would have likely spurred a strong rally. However, the S&P and Nasdaq both sold off shortly after the open and eventually found support near the lows of October 15. After bouncing off support from October 15, the S&P and Nasdaq both stayed in a very tight range for the remainder of the trading day, although the Nasdaq had more relative strength than the S&P in the afternoon. The Philly Fed number at 12 noon caused a knee-jerk reaction in the futures, but they quickly bounced right back into the trading range, effectively maintaining the boredom that was previously established. As we discussed a few days ago, gaps can be great for traders who take a lot of positions overnight and are on the right side of the market. However, gaps with tight trading range days like we saw yesterday really make it difficult to profit from intraday trades.

Although the broad market basically went sideways for most of the day, there were a few sectors that showed relative strength to the market and even rallied as the market went lower. Those sectors were Software (SWH), Semiconductors (SMH), and Pharmaceuticals (PPH). Transports were also very strong yesterday, which was odd considering oil was also strong. Since Semis and Pharmaceuticals both had relative strength, we took both PPH and SMH overnight in anticipation of higher prices if the market sustains the current rally. Both of those indexes closed near their highs of the day, which bodes well for a gap up this morning. Just like with IBM yesterday, it looks like MSFT is gonna save the free world and gap the market today due to their positive earnings report last night. We’ll see if we get a repeat of the past several days or if a trend is able to develop.

The plan for today is pretty simple and is essentially the same as yesterday. If we break above the three-day highs, there will probably be some nice buying opportunities. But if we are not able to stay above the three-day high, the trading range will probably continue. Also remember that today is Options Expiration day. Therefore, it is usually best to stay out of the market during the final hours because stocks and indexes often trade in a choppy manner. Our overall thoughts are that if the gap up holds today and the market does not selloff into the close (especially because it is a Friday), then we have a decent chance of seeing a sustainable rally during the next several weeks. But, if the market comes back into the trading range, then be prepared for more days that lack solid intraday trading opportunities.

We are not looking to enter any new positions today because we are already in three positions. However, we will be adding to our existing positions of PPH and SMH from yesterday if they break the trigger prices below. There will probably not be any intraday updates today because we don’t want to enter any more new positions until we get some confirmation that we can close strong going into the weekend, which will be made more difficult because of Options Expiration today.




Today’s watch list:

PPH – Pharmaceutical Index HOLDRS
Sector: Pharmaceutical
Long

Trigger = HALF at 76.40 (above yesterday’s high)
Target = 78.10 (just below the high of Aug. 27)
Stop = 75.40 (below yesterday’s afternoon support level)

Notes = The Pharmaceutical Index (DRG.X) has shown a lot of relative strength to the market during the past several weeks, especially yesterday when the index gapped up and barely sold off as the broad market was getting whacked. This is one of the few sectors that is also above resistance of its 20-MA on the weekly chart and is well above its 40-MA on the daily. If we break above yesterday’s high, there is not much resistance until the high of August 27. Additionally, it was one of the few sectors that closed at the high of the day yesterday.


SMH – Semiconductor Index HOLDRS
Sector: Semiconductor
Long

Trigger = HALF at 22.43 (above the high of October 15)
Target = 25.25 (resistance of the high of September 11; also the 20-week moving average)
Stop = 21.40 (below the low of October 15)

Notes = MSFT earnings likely to drive this one higher, especially if it takes out the high of October 15. Again, we are looking to add to our overnight position from yesterday. Time horizon on this trade is probably one week (maybe less if momentum kicks in). Remember the gap rules.


Deron’s Report Card:

We only attempted one intraday trade yesterday, which we put a tight stop on due to the tight trading range the market was in. However, we lowered the trigger price on two of our swing trades and bought HALF positions of both SMH and PPH, which we took overnight. If they hit the above trigger prices, we will add the other half of the shares to make an average price on the full position size.
“Swing” trades (per The Wagner Daily)

Closed Positions:

    (none)

Open Positions:

    SMH long (from Oct. 17) – bought HALF position 21.65, stop at 21.40, target 25.25, open with + 0.05

    PPH long (from Oct. 17) – bought HALF position 76.10, stop raised to 75.40, target 78.10, open with + 0.05

    WMH long (from Oct. 2) – bought 30.35, stop raised to 30.20, target 42.50, open with + 1.45

Intraday trades (per Intraday Updates E-mail Service)

    QQQ long – bought 23.63, stopped out 23.43, closed with (0.20)

Glossary and Notes:

Remember that opening gaps that cause stocks
to trigger immediately on the open carry a higher degree of risk because the
gaps (both up and down) often do not hold. Use caution if trading stocks with
large opening gaps.

Trigger = Exact price that stock must trade
through before I will enter the trade. If a long position, I will only enter the
stock if it trades at the trigger price or higher. For a short position, I will
only enter the stock if it trades at the trigger price or lower. It is really
important to only enter the position if the trigger price is hit, otherwise the
trade becomes riskier.

Target = The anticipated price I am
expecting the stock to go to. However, this does not mean that I will
always hold the stock to that price. If conditions warrant, I will sometimes
take profits before that price, in which case I will notify you of the
change.

Stop = The price at which I will have a physical stop
market order set. As a position becomes profitable, this stop price will often
be adjusted to lock in profits. Again, you will always be notified of such
changes in the next daily report or intraday if you subscribe to intraday
updates.

SOH = Sit On Hands (Don’t Make Trades)

Closed P&L under Deron’s Report Card is based on the actual
price I closed my trade at, not just the theoretical target or stop price listed
for each stock. Open P&L is based on the closing prices of the most recent
trading day.

Unless otherwise noted, average holding time is 2 days to 2
weeks once a position is triggered. Updates on open positions are provided
daily.


Yours in success,

Deron M. Wagner

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