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The Wagner Daily


The first half of the day yesterday was rather volatile and choppy. The market began by showing strength at the open, rallying above the high of the previous afternoon, selling off to break below the lows of the previous day, a rapid reversal back up almost to the morning highs, and then a sharp selloff again down to the lows at 12 noon, after the Philly Fed number was released. This created very difficult trading conditions for trend traders in the morning session because there was a lack of follow-through on both sides.

The afternoon session could best be described as being driven purely by news. As you probably already know, news was released early yesterday afternoon that UN Inspectors found some empty chemical warheads in Iraq, prompting speculation that they were recently filled with chemical weapons. Initially, this caused a selloff in the market, but not nearly as much as one would expect. In fact, the wave of selling that hit when the news was released only caused the Dow to drop about 30 points. From that point, it took another 90 minutes before new lows were set in the major indices and those new lows only lasted about an hour before the market rallied and closed just below the “pre-news” level.

One thing I have learned in all my years of trading is never assume which direction the market is going to go based on a release of a news event. Negative geopolitical news is often already priced into the market which causes an opposite effect of what you would expect when the news event is actually released. This is where the term “Buy on the rumor, Sell on the news” comes from (or the opposite in this case). In the case of yesterday, although the news could have been construed as negative, the market did not show much of an initial negative reaction because the selloff was minimal, which was a caution against aggressively getting short. This was further confirmed by the tight and narrow range the market was trading in shortly after the news was released and also the subsequent rally into the close.

Although choppy, non-trending days are difficult for trading the broad-based indices such as QQQ, SPY, and DIA, we look for sectors that are showing relative strength or weakness to the broad market on days like yesterday. We bought BBH (Biotechnology HOLDRS) and RTH (Retail HOLDRS) yesterday because both sectors were showing relative strength to the market. In a nutshell, sectors that do not drop when the market does or those that drop at less of a percentage than the market are always going to be the first sectors to rally when the market eventually turns and goes higher. The sectors with relative strength will also be the last ones to drop if the market collapses. Therefore, your risk is lower and your potential profits are greater by trading sectors with relative strength or weakness to the market. The following overlay chart of BBH and SPY clearly gives you a graphical representation of the relative strength that was in the Biotechnology sector yesterday:

On the chart above, notice how BBH kept setting new highs, even as the market set new lows. When the market weakened in the late afternoon, BBH finally sold off a little bit, but still stayed in the upper 1/3 of its intraday range. Finally, notice how BBH quickly reversed and rallied back up to over $93 on just a minor broad-market rally into the close.

Several subscribers emailed us yesterday telling us how much they enjoyed yesterday’s session in the ETF Real-Time Room because we provided several great examples of how to use relative strength trading and also how to hedge positions through a broad-based index ETF at the same time. If you would like to learn more about relative strength ETF trading, you may want to check out an article I wrote that will be published in the upcoming March issue of Active Trader magazine or send me an email with any questions you have.

Despite the pre-market weakness in the futures market, we feel there is a good chance the market will rally or at least stabilize today. The biggest reason you need to be cautious on the short side of the market is that the major indices are each coming into major moving average support on the daily charts. Here are the key levels to watch for support today: SPY (S&P 500 index) has support of its 50-day moving average at 91.23 and its 20-day at 90.88. The 91 area is also support from the lows of January 8 and from the highs of the January 2 rally (remember that former resistance becomes new support). DIA (Dow Jones Industrial Average) has its 50-day at 86.30 and its 20-day at 85.99. Just like SPY, there is also support of the Jan. 8 lows and Jan. 2 highs. QQQ has its 200-day MA at 26.27 (yesterday’s low was 26.25. . .hmmm). There is also a 50-day at 26.10 and 20-day at 25.84. There is likely to be weakness in the tech sector due to IBM and MSFT earnings, but we could see sector rotation into other sectors that have inverse relationships to the tech stocks (such as our BBH and RTH longs). Also keep in mind that consecutive trending days typically do not last for more than 2 – 3 days without seeing a reversal day in the other direction. Since the past two days were downtrending, today would be the third day of a downtrend which often causes a reversal in the afternoon session and a follow-through rally the next day.

As a reminder, the market will be closed on Monday for Martin Luther King Day. There will be no Wagner Daily on Monday, but publication will resume as usual on Tuesday. Enjoy the long weekend!

Today’s watch list:

MDY – MIDDIES (S&P Mid-Cap Index Tracking Stock)


Trigger = below 79.70 (below the 20 and 50-day MAs and below the trendline from lows Oct. 10)
Target = 78.60 (support of 100-day MA)
Stop = 80.30 (above the 20 and 50-day MAs and lows of past two days)

Notes = If MDY breaks the 20 and 50-day MAs, it could trigger a selloff down to the 100-day MA. MTG Opening Gap Rules apply to 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).


    SPY short (from Jan. 16) –
    shorted 92.33, covered 92.63, points = (0.30), net P/L = ($66)

Open Positions:

    RTH long (from Jan. 16) –
    bought 71.65, will adjust stop and email alert after open, open points = (0.45), open P/L = ($48)

Notes: Because of the pre-market gap down, we want to wait until the open before setting a new stop price on RTH so that we are not taken out on the gap. We are also long a DOUBLE position of BBH, which was called in the ETF Real-Time Room yesterday, but it is not listed above because it was not listed as a play in The Wagner Daily. I mention it simply as a courtesy to non-ETF Room subscribers.

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

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

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.

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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