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The Wagner Daily


Commentary:

As expected, yesterday was rather choppy as the markets continued their multi-week sideways trading range. Although we did not see many solid technical reasons to go long yesterday morning, the market demonstrated its resiliency by recovering from Tuesday’s Consumer Confidence selloff and erasing the losses as if they never occurred. This demonstrated to us that the sentiment of the market continues to remain somewhat positive despite any negative news or reports that are thrown at the market. Because the market recovered so quickly yesterday morning, we saw a selloff in the early part of the afternoon yesterday which caused us to believe that the markets were headed back down to the lows of the day based on the fact that the S&P broke back below its 200-period MA on the 15 minute chart and the previous day’s close, both of which are typically critical support levels when trading intraday. Despite all the intraday overhead resistance, the markets reversed once again into the close and rallied back to test the highs that were set earlier in the day. This is an important trend we have been seeing that is confirming the market’s resilience.

The major market indices have been in a sideways trading range on the daily charts since October 15. This makes intraday trading a bit challenging because of the lack of follow-through that we get on an intraday basis. However, the positive news is that the longer the consolidation period occurs, the more likely we will see another significant leg up in the markets. On a technical level, the consolidation period is essentially the same as a correction by time rather than price. This enables the moving averages to cross over and rise up to meet the price of the market on the daily charts. Volume on the NYSE has also been a bit light for the past several weeks, which is usually what you see in bullish periods of consolidation because it indicates that sellers are not stepping in to drive prices lower even though they have the opportunity to do so. Volume will typically increase once we break out of the trading range. For the reasons mentioned above, we believe we will see a significant move in the markets during the next week or so. The direction of the move will be decided based on whether or not we can continue to hang tough near the recent highs.

The weekly charts are starting to look better for most of the major indexes because the Nasdaq and S&P are both holding firm above their 20-week moving averages, which should act as support moving forward. If we break out of the trading range, the next stop is probably the 50-week moving averages. This has the potential to yield a large gain if the market can muster up the strength to get there. We cannot base intraday trading decisions on weekly charts, but they do give us an idea of the “big picture” in the markets.

Keep in mind that there are a whole slew of economic reports due out over the next two days. The big ones today are the advance GDP number and U.S. jobless claims, both due out at 8:30 am EST today. If either of these numbers are below estimates, it will be interesting to see how the market reacts due to the fact that the market has shrugged off Tuesday’s (Lack of) Consumer Confidence report. However, if the economic numbers come in better than expectations today, that will likely serve to boost the already bullish sentiment in the market. It is also important to note that since today is the last day of the month, we are likely to see “window dressing” by the mutual funds as they manipulate their portfolios and buy strong stocks to make their portfolios look better as we approach the end of the year.

The bottom line going into today is that intraday and low-risk swing trade opportunities are going to remain scarce until the trading range is broken on the daily charts. Let me also close with a few friendly reminders: Remember that making money is more important than being right, so we really don’t care if we think the market is due to sell off but it goes higher instead. It also does not matter if there is a fundamental reason for the market to go higher or not. The market will always do what it wants to do and it is foolish to fight it just because your ego prevents you from admitting your opinions are wrong. Happy Halloween!



Today’s watch list:


SMH – Semiconductor Index HOLDRS
Sector: Semiconductors
Long

Trigger = 24.60 (above the double top on the daily chart)
Target = 25.39 (resistance of the 100-day MA)
Stop = 24.10 (tight stop below yesterday’s close in case the breakout fails)

Notes = With the exception of Tuesday’s selloff, the SOX index has been very strong during the past few weeks and has been leading the way of the broad market, especially the Nasdaq. Yesterday’s closing price in SMH was the highest we have seen since September 11 and also put it within striking range of breaking the high of October 28. If that happens, we will have broken yesterday’s intraday double top in the index. However, we will only buy if the double top is broken. Buying before the trigger price is risky because the double top could stop any subsequent rally.


RTH – Retail Index HOLDRS
Sector: Retail
Short

Trigger = 75.25 (below support of the double bottom of prior two days)
Target = 74.15 (support of the 20-day MA)
Stop = 75.85 (just above the breakdown level)

Notes = We like the relative weakness the Retail sector has shown the past several days, which is probably being spurred by the fear of weak holiday spending this year on the heels of the (lack of) consumer confidence report. If the RLX (Retail) index breaks the double bottom, RTH will follow suit.


Daily Reality Report:

Just a choppy day yesterday that resulted in small overall losses with our overnight positions and the few intraday trades we attempted. Since our overnight positions were only HALF share size, risk was minimal and losses were small. Most importantly, we managed our trades properly yesterday which prevented us from giving back our profits of the previous day. Your goal in trading should not be to make money every day, but rather to minimize losses on the choppy days so that you can retain profits from the highly profitable days (which typically come only about once per week).

Click here to read the details on how we calculate our report card statistics.

“Swing” trades (per The Wagner Daily)

Closed Positions:

    BBH long –
    bought 87.30, sold 87.68 (avg.), points = + 0.38, net P/L = + $60

    QQQ short (HALF position from Oct. 29) –
    shorted 23.85, stopped out at 24.20, points = (0.35), net P/L = ($110)

    SMH short (HALF position from Oct. 29) –
    shorted 22.93, stopped out at 23.33, points = (0.40), net P/L = ($131)

Open Positions:

    (none)

Intraday trades (per Intraday Updates E-mail Service)

    SPY short –
    shorted 89.19, trailing stop hit at 89.21, points = (0.02), net P/L = ($8)

    DIA short –
    shorted 83.98, trailing stop hit at 84.20, points = (0.42), net P/L = ($80)

    SPY short (re-entry) –
    shorted 88.90, stopped out at 89.37, points = (0.47), net P/L = ($84)

    DIA short (re-entry) –
    shorted 83.91, stopped out at 84.35, points = (0.44), net P/L = ($84)


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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