The Wagner Daily | January 3, 2003

Commentary:

Yesterday began with an opening gap above the previous day’s highs, effectively trapping the shorts and creating a “bear trap.” Upon the open, sellers stepped in and the market lost a bit of its opening gap, but S&P futures (and SPY) found support at the high of the previous day, while the Nasdaq was initially a bit weaker and sold off to just above the previous day’s close. However, the buyers stepped in going into the first reversal period around 9:50 am and the major indices quickly reversed to set new highs and set in motion an uptrend that lasted the entire day.

When the market began selling off after the initial opening gap, we were pretty confident that it would find support and head higher due to divergence between the TRIN (Arms Index) and the price of the S&P and Nasdaq futures. Primarily, we noticed that as the Nasdaq futures were selling off, the TRIN stayed low and did not rally much. This type of divergence is often an indicator as to whether or not a move will continue in that particular direction. We also quickly noticed that the advancing volume was much higher than declining volume during the first twenty minutes, further hinting that the market was going to head back up to the opening highs. Finally, many individual sectors were poised for a reversal on their daily charts because they were getting oversold. Through this combination of indicators, we felt it was a good risk/reward to buy the opening pullback to support rather than waiting for the 20-minute highs to be taken out as our gap rules specify. In the ETF Real-Time Room, we bought QQQ and SMH on the pullback and trailed a stop higher the entire day, legging out of the position in pieces and eventually selling the last of our positions a few cents below the highs. Overall, yesterday was very profitable for us because we got more aggressive in our position size, shifted out of PMC mode, and micro-managed our positions for maximum profitability.

It was great to see a little volume return to the market, although it still closed below its 50-day moving average. Yesterday was the first day in quite a long time that a morning trend remained intact throughout the entire day without severe choppiness or an afternoon reversal. As more traders and investors return from the holidays, we expect the volume to keep picking up, especially after this weekend. That should aid in allowing the market to have better follow-through during the coming weeks and months. Assuming the Dow holds most of yesterday’s gains, it will close above the key 8493 level we discussed in yesterday’s Wagner Daily. If that happens, the Dow will close positive for the last five days of Decemeber and first two days of January, historically increasing the odds of higher prices later in the year.

Although all the major indices were strong yesterday, SPY and DIA showed the most relative strength and both broke the upper channel of their primary downtrend lines from the highs of December 2. It was also interesting that not only did they close above their 20-day MAs, but also above their 50-day MAs! If there is follow-through over the next several weeks, this could enable the major indices to rally back up to test the December 2 highs. In addition to SPY and DIA, there was also broad market strength and many sector ETFs also closed above the resistance of the upper channel of their downtrends from the highs of December 2. However, it’s interesting to note that the Nasdaq futures (and QQQ) did NOT convincingly break above the upper channel of its daily downtrend line and still has overhead resistance of both its 20 AND 50-day MAs. Despite the strength in the Nasdaq yesterday, the rally did not keep pace with the S&P and Dow, so we need to see the Nasdaq confirm the rally by breaking the 20 and 50-day MAs, as well as its trendline. If this does NOT happen, there is a good chance the divergence will kill any follow-through rally attempt in the S&P or Dow. The daily charts below illustrate the divergence between SPY, DIA, and QQQ:

The most likely scenario for today is that we see a little bit of a correction either by time or price. The market’s consolidation that occurred during yesterday afternoon should aid in providing a base of support for the major indices today and could allow a correction by time to occur as the short-term moving averages rise to support the prices. However, we would not be surprised to see a little price correction in the form of a retracement off of yesterday’s highs. In this scenario, we use Fibonacci to determine a predicted pullback for a low-risk point to re-enter long positions. For SPY, a 0.382 retracement from the December 31 low to yesterday’s high is equal to 89.60, while a 0.50 retracement is around 89.15 (which is also the 200-MA on the 15 min. chart). For DIA, a 0.382 retracement is at 84.84 and 0.50 is at 84.40. For QQQ, we would prefer to see a break ABOVE yesterday’s high rather than a retracement before going long due to overhead resistance of the trendline we showed you above. There is a good chance SPY and DIA will trade sideways today while QQQ sets new highs and catches up due to sector rotation.

Today’s watch list:

SMH – Semiconductor HOLDRS

Long

Trigger = above 24.18 OR below 23.30 (above the high of prior week OR a 0.382 Fibo retracement down to support)
Target = 25.05 (price resistance of the 50-day MA)
Stop = 23.70 (if trigger is 24.18) OR 22.90 (if trigger is 23.30)

Notes = It is probable that we will see some more follow-through in the Semiconductor index because it was one of the most beaten down sectors and is a bit out of sync with the market now. We will look to buy on a break above resistance OR a pullback to support. Remember the gap rules.

QQQ – Nasdaq 100 Index Tracking Stock

Long

Trigger = above 25.58 OR below 25.17 (above the high of yesterday, which is also the daily trendline and 20-day MA, OR a 0.382 Fibo retracement down to support)
Target = 26.20 (high of Dec. 17)
Stop = 25.20 (if trigger is 25.58) OR 24.85 (if trigger is 25.17)

Notes = Similar setup to SMH above. A break above yesterday’s high would represent a break above the daily trendline and 20-day MA. Remember the gap rules.

Daily Reality Report:

Trades from The Wagner Daily only (ETF
Intraday Real-Time Room trades reported separately on a weekly basis):

We bought SMH on the opening pullback and legged out through the day. When it came within pennies of our initial price target, we took profits and sold it rather than taking it overnight. Sometimes swing trades hit our price target in just one day, which is even better!

Closed
Positions:

net P/L = + $198

Open Positions:

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