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The Wagner Daily


Commentary:

Much like the action of the prior two days, yesterday began with an
opening gap (although not as sharp this time), a quick recovery to fill the gap,
and then a narrow, range-bound session from late morning through the rest of the
day. It’s an interesting pattern we have seen during the past three trading days
because it indicates a lot of indecision at a critical point where the market is
technically poised to make a big move one way or the other. Unfortunately, this
type of trading action provides very few low-risk trading opportunities unless
you catch the initial move in the first hour of trading. Beyond the first hour,
each of the past three days has fallen into the same narrow trading range as the
previous day. The longer this narrow trading range continues, the more powerful
the move will eventually be (whether up or down). You can think of the past
three days of congestion as someone stretching a rubber band and the more it is
stretched, the further it will fly when released from the fingers.

In
yesterday morning’s session, the S&P and Dow were showing relative weakness,
trading at and slightly below the previous day’s low, while the Nasdaq was
trading above the previous day’s close and was attempting to breakout. However,
the roles completely reversed by early afternoon when the Nasdaq began losing
intraday price support while the S&P was testing its high of the day. This
type of role reversal often causes choppy trading conditions because the two
major indices are not in sync with each other. Yesterday afternoon it caused
multiple false breakout attempts in SPY and several false breakdown attempts in
QQQ. It’s difficult for the S&P to go anywhere without strength in the
Nasdaq and vice versa. Fortunately, we stayed on the sidelines in cash from late
morning through the rest of the day because we noticed the market was falling
into the same pattern as the previous two days and did not want to get chopped
up. This move to stay in cash undoubtedly preserved capital that would have
otherwise been lost in yesterday afternoon’s chop. Overall, yesterday was a
“wait and see” day with very little tradeable action because the “smart money”
was on the sidelines waiting for Intel to report after the close.

Today
we are likely to see the real effect of Intel’s earnings report. They beat
earnings and revenue expectations, but were cautious on demand and capital
spending. Most traders already expected Intel to beat earnings expectations, so
any reaction will likely be due to the rest of Intel’s comments. While we
normally do not discuss individual stocks, Intel is such a giant that it has the
potential to move the entire market, and thus the ETFs we trade, in sympathy. I
am pretty certain that one of the reasons the market has been so choppy during
the past several days was that many traders and investors were waiting for
Intel’s earnings (among others).

Finally, keep an eye on those 200-day
moving averages of DIA and SPY. Since both indices have been trading sideways
for the past week, the 200-day MA has been slowly creeping down to meet the
prices of DIA and SPY. This means that a test of this key level is likely to
happen very soon. Because the 200-MA is so powerful, it will probably not be
easy for the indices to break through on the first attempt. However, if the
indices ARE able to break the 200-day MA, we could see a substantial move to the
upside. Also remember that QQQ is right at the weekly trendline resistance so
the action of the next week will “make or break” the short-term direction of the
Nasdaq. As I mentioned yesterday, there are a lot of mixed signals right now
that make being long equally as risky as being short, especially if this trading
range continues. Because of this, day trades are much safer than overnights
right now (which is why we have been cash overnight the past two days). However,
once we finally get the breakout or breakdown move, we expect to see some solid
trending and tradeable action. Be aware that there is also a PPI report due out
at 8:30 am today which could potentially be a market mover.


Today’s watch list:


SPY – SPYDERS (S&P 500 Index Tracking Stock)

Long

Trigger = HALF above 93.60, HALF above 93.90 (half above break
of yesterday’s high, add above Jan. 13 high)
Target = 95.20 (resistance of
200-day moving average)
Stop = 92.95 (below price support at 93; also below
20-MA on 60 min. chart)

Notes = Simply a breakout play in the event the
S&P finally moves out of the consolidation of past two weeks.


QQQ – Nasdaq-100 Index Tracking Stock

Long

Trigger = above 27.27 (above yesterday’s price resistance at
27.20)
Target = 28.20 (just below daily price resistance from end of
November)
Stop = 26.95 (below yesterday afternoon’s price support at 27.00)

Notes = Same play as SPY above, except that QQQ is also poised to break
WEEKLY price resistance


RTH – Retail HOLDRS
Long

Trigger = above
72.15 (above yesterday’s high)
Target = 74.30 (just below resistance of
20-week MA)
Stop = 71.20 (below price support of past week)

Notes =
The Retail Index, which we profited from last week, has been correcting by time
and appears poised to make another leg higher. We will buy on a break of
yesterday’s high.


Daily Reality Report:

Below is Morpheus Trading Group’s daily
performance report of closed trades and an update on all open positions from
The Wagner Daily (ETF Intraday Real-Time Room trades are reported
separately in The Wagner Weekly).

Closed
Positions:

    DIA short (HALF position from Jan. 14) –
    shorted 87.68, covered 88.15,
    points = (0.47), net P/L = ($50)

Open
Positions:

    (none)

Notes: Per yesterday’s newsletter, we shorted a half
position of DIA when it triggered because the Dow was weak in the morning.
However, early strength in the Nasdaq dragged the broad market higher, hitting
our tightened stop. By legging in to the position with two separate entry
prices, we minimized the loss by only being in a half position; the second half
never triggered.

Click here for
a detailed explanation of how daily trade performance is calculated.

Click here for a detailed
cumulative report of MTG’s trading performance (updated weekly)


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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