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The Wagner Daily


Commentary:

Welcome to 2003! We hope you had a fun and safe New Year’s celebration. Rather than discussing Tuesday’s uneventful trading session, I will kick off the new year by taking a look at what type of market performance we might expect in the coming year. I will begin by sharing some interesting statistics from the Stock Traders Almanac that we discussed in the ETF Real-Time Room on Tuesday.

Since 1969, the average performance in the Dow during the 7-day period consisting of the last five trading days of December and the first two days of January has been a 1.7% gain. If you go back another 19 years to 1950, the Dow has produced an average gain of 1.5%. Historically, this 7-day period has yielded decent gains. However, the few years in which the Dow closed negative during that 7-day period have each tended to PRECEDE major bear markets. There have only been 8 times during the past 32 years in which the Dow closed negative during that 7-day period and each of those years resulted in lower prices by the end of the year. So far, the Dow has dropped from 8493 to 8341 during the last five trading days of December. This represents a loss of 1.7% (152 points). Therefore, if the Dow fails to rally and close back above 8493 within the next two days, this year would meet the criteria for being one of the few periods in which the Dow did not close positive during that 7-day period. Consequently, it would HISTORICALLY point to much lower prices ahead in the new year. Obviously, this statistic is only based on historical performance and does not indicate any kind of future performance. Nevertheless, I felt it was an interesting statistic worth noting.

From a purely technical basis, the major market indices will begin 2003 in a proverbial tug-of-war between the bulls and the bears. This battle has been represented by the choppiness and lack of direction during the past several weeks. Trading volume has been incredibly thin, despite the holiday period, indicating a general lack of commitment on either side of the market. We have been in PMC (Preserve My Capital) mode because recent intraday trading conditions have been quite challenging due to the broad lack of follow-through in the markets.

The bullish argument is that the strength of the October rally was too powerful for it to simply collapse. Many indices have been consolidating and are building a healthy support base after the rally from the October lows. Because of this support base, odds are good that we will see another rally attempt to test the December 2 highs. In addition, QQQ (Nasdaq-100 index) is still holding support of its 20-week moving average and both SPY (S&P 500 index) and DIA (Dow Jones Average) could easily get back above their 20-week MAs. QQQ also closed at a 50% Fibo retracement level from the lows of October to the highs of December 2, which will probably act as support. Perhaps most importantly, both SPY and DIA are both in the process of completing a bullish inverse head and shoulders pattern on the weekly charts. I have annotated this for you on the weekly chart of SPY below:

The bearish argument is that both the weekly and monthly charts of the major indices show no signs of a break in the current downtrend. While the SPY daily chart shows a support base building, the monthly chart shows nothing but a bounce into resistance of the upper channel of the primary downtrend line. The longer the time period you are analyzing, the more significant support and resistance levels become. Therefore, resistance on a monthly chart is much more important than price resistance on a daily chart. Take a look at the monthly chart of SPY below and you will see that the downtrend is still intact:

Further complicating the bullish/bearish argument is the unknown of how the U.S. will respond to the Iraq situation sometime during the next several months. The last time we attacked Iraq, the market rallied once the war began. However, there is speculation that things could be different this time because of the threat of retaliatory use of “weapons of mass destruction.” Since we have never experienced that, it is unknown how much damage would be caused, and subsequently how the market would react. Then again, we may not attack Iraq at all which could provide the market a relief rally. There is too much speculation on both sides of the argument. Without a doubt, the Iraq situation has been one reason why we have seen the recent drop in overall trading volume because the “smart money” is not willing to place big bets on either side of the market until we see some resolution.

I have presented you with an unbiased view of what we might expect in the coming year. Personally, I do not have much of a bias to either side of the market right now and prefer to trade in a very short time frame, analyzing all the charts with an unbiased point of view. It’s a lot safer than trying to guess or getting wrapped up in the media frenzy. The one certainty in the coming year is that I am glad to be a short-term ETF trader and not a “long-term” investor!


Today’s watch list:


SMH – Semiconductor HOLDRS

Long

Trigger = 22.55 (above the upper channel resistance of the 4-day downtrend; also the 20-MA/60 min.)
Target = 23.85 (price resistance of the 100-day MA)
Stop = 22.10 (below the prior day’s close)

Notes = If the current premarket gap holds in the Nasdaq, SMH is likely to see a strong rally today because it has been beaten down so hard over the past several weeks and is now at 0.618 Fibo support off the October rally. Nevertheless, we will wait for confirmation by making SMH break resistance of the upper channel of the downtrend line before going long. If this triggers and closes strong, we will plan on holding for a few days to achieve target. Remember the gap rules.


Daily Reality Report:

Because of the increased number of intraday
trades in our new ETF Real-Time Room, we are in the process of modifying the way
we report daily results in order to minimize confusion to subscribers of The
Wagner Daily
. We will continue to report and update you on open positions
each morning; you will always know where we stand with any open positions that
were discussed in the newsletter. In addition, all trade statistics will
continue to be compiled as they were before. However, we will be displaying the
summary of all intraday trades (discussed in the ETF Room) only once per week
(in The Wagner Weekly) instead of daily. This is a more efficient and
less confusing way of reporting our trades, especially on days when we enter the
same position two or three times intraday.

Click here to read
the details on how we calculate our Reality Report statistics.

Trades only from The Wagner Daily (ETF
Intraday Real-Time Room trades not reported):

Although we initially had a nice profit in DIA, the bad consumer confidence report that was released at 10:00 am on Tuesday caused a sharp selloff in the markets that stopped us out of DIA.

Closed
Positions:

    DIA long (HALF position from Dec. 30) –
    Bought 83.33, stop at 83.10,
    points = (0.23), P/L = ($52)

Open Positions:

    (none)


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 1 to 3 days once a position is
triggered. Updates on open positions are provided daily.


Yours in success,

Deron M. Wagner

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