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The Wagner Daily


Commentary:

As anticipated, the Nasdaq showed relative strength to the S&P and Dow on Friday due to sector rotation back into the technology sectors. This divergence became clear within the first hour of trading when QQQ traded significantly above the previous day’s high, but SPY formed a double top. Although the Nasdaq was poised to continue its rally for the remainder of the day, the large percentage rally in the S&P and Dow the previous day made it unlikely those two indices would trade higher without a correction first. As such, all the major indices consolidated near the previous day’s highs, allowing the moving averages to rise up to provide intraday price support as the indices traded in a narrow range and corrected by time. Buyers returned back to the market during the final hour of trading, enabling both the Nasdaq and S&P futures to close higher than the previous day and at their intraday highs. The Dow Jones Average (and DIA) was the weakest of the major indices and was unable to close above its morning high. However, that is not surprising given the 250 point rally over the course of two trading sessions.

Overall, the market acted very well on Friday. When the market has a solid trending day like we saw on Thursday, it typically consolidates and trades near the highs in a narrow range the next day. As you often hear me say, strong trends either correct by price or time and Friday was a perfect example of a correction by time. Friday’s slightly lower total market volume and simultaneous ability to trade near Thursday’s highs indicated that while the buyers took a rest, the sellers were not anxious to immediately step in and drive prices lower. When we see a strong trending day followed by a narrow range consolidation day near the highs, as we have seen the past two days, that pattern usually positions the market for upside continuation with another trend day higher, which is what we expect today. We took half positions of both QQQ and SMH long overnight for this reason. When trading this pattern, the stop is typically set just below the low of the consolidation day (Friday).

We need to carefully watch the next several days for QQQ (the Nasdaq-100) to get back above its 50-day moving average. While both SPY and DIA have rallied and closed above their 50-day MAs, QQQ has not confirmed the move yet. It is also important for the almighty Semiconductor Index to get back above its 50-day MA as well. However, there has been strength in Networkers (NWX index, but no ETF), Wireless (WMH), and Software (SWH), all of which are poised to breakout and could lead the Nasdaq higher. On the other hand, weakness in Biotechs (BBH) continues to be a drag on the Nasdaq. Although there was relative strength in the Nasdaq on Friday, we need to see more of that over the next several days in order for the market’s recent gains to be sustained.

You may recall that in the early part of last week, before the market rallied, I mentioned in The Wagner Daily that one factor that could turn the market around (at least in the short-term) was the fact that QQQ (and hence the Nasdaq-100) was sitting on support of its 20-week moving average AND was at a 50% Fibonacci retracement of the October rally to December highs. In a classic case of Fibonacci and moving average convergence, QQQ found support and perfectly bounced off that level last week. I have annotated a weekly chart of QQQ below to show you these levels:

For today, we need to keep an eye on Friday’s lows in the major indices: SPY 90.50, DIA 85.62, QQQ 25.28. In order for there to be a good chance of additional upside prices, it is technically important for Friday’s lows to not be violated. Remember that QQQ has resistance of its 50-day MA just overhead, but both SPY and DIA have support of their 50-day MAs underneath. The ISM Services Index is scheduled to be released at 10 am today and that could also set the tone for today’s session. While the pattern of a trend day followed by a narrow range consolidation day usually leads to higher prices, continuing fears about a war with Iraq could cause resistance for this technical setup. While we have a bit of a bullish bias entering today, we’re also standing by ready to pull the plug at a moment’s notice if the market justifies such action. In other words, don’t fall in love with the recent market gains because there are too many factors that could cause it to reverse in the blink of an eye. As always, honor your stop losses so you don’t get caught holding the bag if the market reverses.


Today’s watch list:


IWM – iShares Russell 2000 Index Tracking Stock

Long

Trigger = 78.20 (above the two-day high)
Target = 79.50 (just over high of Dec. 12)
Stop = 77.50 (below close of Friday)

Notes = This is looking like a decent breakout play. IWM is sitting above all its major moving averages and consolidated nicely on Friday. A break above the two-day high should cause a rally up to its next major price resistance around 79.50


Daily Reality Report:

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

We bought HALF positions of both SMH and QQQ on the opening pullback to support and added to them on confirmation of the breakout. When the market consolidated and attempted to rally later in the afternoon, we sold HALF our shares for a profit as the market double topped, but took the other HALF of shares overnight in expectation of upside follow-through.

Closed
Positions:

    SMH long (HALF position) –
    Bought 23.71, sold 24.22,
    points = + 0.51, net P/L = + $73

    QQQ long (HALF position) –
    Bought 25.49, sold 25.61,
    points = + 0.12, net P/L = + $18

Open Positions:

    SMH long (HALF position from Dec. 3) –
    Bought 23.71, stop raised to 23.65,
    open points = + 0.34, open P/L = + $47

    QQQ long (HALF position from Dec. 3) –
    Bought 25.49, stop raised to 25.25,
    open points = + 0.21, open P/L = + $40


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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