The Wagner Daily | January 16, 2003

Commentary:

The imminent break of the trading range I have been talking about for
the past several days finally happened yesterday in the form of a breakdown that
set in motion a smooth and steady downtrend that remained intact for most of the
day. Although the major indices, as represented by DIA, SPY, and QQQ, each began
the day with an opening gap slightly above the previous day’s high, sellers
immediately stepped in after the open and caused each of the major indices to
break their prior afternoon’s support base within the first fifteen minutes of
trading. By 10:30 am EST, the Dow (DIA), S&P 500 (SPY), and the Nasdaq-100
(QQQ) each broke below their previous day’s lows which further increased the
selling that continued until late afternoon. Although the market attempted to
bounce during the final two hours of trading, the retracement was relatively
minor and the rally ran into resistance of the prior day’s low. This is a
classic example of how prior support levels, once broken, become the new
resistance levels. The rally also ran into 0.382 Fibonacci
resistance. The 15-minute chart of SPY below illustrates this:

Because of the vast amount of time that goes into researching exact
trigger prices for each play in The Wagner Daily, we are always
disciplined about NOT entering any of them UNLESS they hit their exact trigger
prices. As such, we did not enter RTH and SPY longs yesterday, even though SPY
came within 5 cents of its trigger price. We did, however, buy a HALF position
of QQQ when it traded through its 27.27 trigger price, but we only bought a half
position because it triggered within the first minute of opening trading.
Because of the MTG Opening
Gap Rules, we did not want to add to it until we received more confirmation
that the gap was going to hold. Buying only a half position turned out to be a
wise move because the Nasdaq quickly collapsed within a few minutes and QQQ hit
our stop about 15 minutes later. However, the fun began after we got stopped out
of the Qs because we re-assessed the situation in the ETF Real-Time
Room and determined that the market was poised to enter into a downtrend for
the day. We quickly put together a plan in which we would short each of the
major indices (DIA, QQQ, and SPY) once they confirmed the downtrend by breaking
their 30-minute lows. When that happened, we legged into each of the shorts and
implemented our trailing stop strategy which enabled us to maximize the profits
on each position before the market began its retracement in the late afternoon.
This resulted in a nice profit for the day, despite being stopped out of QQQ in
the morning.

Unlike the prior three days, yesterday was a great day for
intraday trading because there was a steady trend that enabled us to use our
trailing stop strategy to maximize profits on the short side. Although we came
into the day with an expectation that the market was probably going to break out
of the trading range and go higher, we also knew it was just as likely that the
market could break support of the trendline from the lows of December 31, which
is what happened yesterday morning. Days like yesterday require you to be
nimble, unemotional, and flexible because you need to quickly realize that your
expectation was wrong, be unemotional about cutting any losses, and be flexible
enough to rapidly revise your trading plan. We had a rather profitable day in
the ETF Real-Time Room because we did just that. If you let your ego get in the
way because you don’t want to admit you were wrong being long, you will end up
staring at your losing long positions rather than just quickly cutting the loss
and reversing the trade by getting short. A big ego and failure to admit
specific trade ideas were wrong is the death of many traders!

Looking at
the daily charts, yesterday’s opening gap above the prior day’s high and
subsequent selloff below the prior day’s low formed what is known as a bearish
“engulfing” candlestick pattern on the daily charts. This bearish pattern often
indicates a sudden change of sentiment and usually precedes a period of selling.
In addition, total market volume was pretty strong yesterday, especially in the
Nasdaq. This is bearish because it indicates that the selloff was caused by a
significant number of sellers, NOT just caused by a lack of buyers. If the
volume yesterday would have been light, I would have been more skeptical about
the prospects of continuation selling. Based on the these factors, I would not
be surprised to see more follow-through to the downside over the next several
days. However, we’re not in love with the bearish side either because each of
the major indices now have support of their 20 and 50-day moving averages just
below. In addition, keep in mind that the Nasdaq (and QQQ) is actually ABOVE its
200-day MA. Therefore, any selloff could be short-lived and caution is still in
order with shorts. Finally, be aware there are some economic numbers due out
today that could set the tone of the market, including the Philly Fed number due
at 12 noon EST. The morning could be choppy until after the Philly Fed number is
released, so proceed with caution.

Today’s watch list:

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

Short

Trigger = below 92.35 (below yesterday’s close and lows of Jan.
13 and 14)
Target = 91.30 (support of highs of Jan. 2 and 3)
Stop = 92.70
(above the 200-MA on 15 min. chart)

Notes = If SPY trades below 92.35,
odds are good there will be some continuation to the downside and a break of
yesterday’s low.

RTH – Retail HOLDRS
Long

Trigger = above
71.50 (above resistance of 3-day downtrend line)
Target = 74.25 (just below
resistance of 20-week MA)
Stop = 70.75 (below yesterday’s low)

Notes
= The Retail Index, which we profited from last week, has been correcting by
time and appears poised to make another leg higher. This was on our watchlist
for yesterday, but it looks even better today because it is right on support of
its uptrend line from the lows of December 30. I also like the risk/reward ratio
in this play.

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:

net P/L = ($70)

Open Positions:

(none)

Notes: Yesterday’s complete trading explained in the
commentary above.

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