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The Wagner Daily


Commentary:

Although many traders expected the broad market to follow-through on the January rally and close at higher prices for the week, several less-than-stellar earnings reports from the large-cap leaders caused the market to break below support of its consolidation level near the January highs. We are right in the middle of earnings season and reports from several more big players this week, along with the outcome of the Iraq situation, will likely set the tone for the remainder of the month. Putting fundamentals such as earnings aside, let’s take a purely technical look at the major indices to determine what we might expect this week, assuming there are no major earnings surprises.

As I have discussed in the past, Fibonacci is a tool you can use to help predict support and resistance levels within trends to determine where an index is likely to reverse in the direction of the trend. The major Fibonacci retracement levels we use are 0.382, 0.50, and 0.618. Generally speaking, if a trend retraces more than 0.50 (or 50%) from the lows to the highs of the most recent trend, the trend is in danger of continuing. Friday’s weakness in the market caused both SPY (S&P 500 Index) and DIA (Dow Jones Industrial Average) to close between their 0.382 and 0.50 Fibonacci retracement levels of the rally from the lows of December 31 to the highs of January 13. A key factor to watch this week is whether or not the lows of January 17 are violated. If so, both indices will be below their 0.50 retracements, which is pretty bearish.

In the chart of DIA below, notice how the low of January 17 (Friday) was exactly a 0.50% Fibonacci retracement level. The SPY chart is similar to that of DIA except that SPY actually probed below the 0.50 retracement level intraday on January 17. I have labeled the Fibonacci retracement levels on the 60-minute chart of DIA below:

Although both SPY and DIA closed between there was bearish divergence in QQQ because the Nasdaq actually closed below its 0.618 Fibonacci retracement level. Remember that the more an index retraces after a rally, the more overhead resistance (excess supply) that is created when an index attempts to recover again. This is why we always say that a 0.382 retracement is a healthy price correction, but anything more than a 0.50 retracement is not. (Click here for more information on Fibonacci). The 60-minute chart of QQQ below illustrates how the Fibonacci retracement levels failed to provide price support during the recent selloff:

Looking at the daily charts, both SPY and DIA tested their 20 and 50-day moving averages on Friday. Both indices closed below their respective 50-day moving averages, but DIA closed a few cents above its 20-day MA while SPY closed a few cents below it. Both the 20 and 50-day moving averages are key levels that the market needs to hold in order to prevent a retest of October 2002 lows. Just as QQQ had bearish Fibonacci divergence, there is also bearish divergence on the daily chart in that QQQ closed well below all its major moving averages on Friday. One of the biggest keys to watch going into this week is whether or not the major indices are able to rally back above their 20 and 50-day moving averages. This is likely to determine the direction of the market for the next several months.

Even though the Nasdaq has retraced more than 0.618 of the January rally, one positive point is that the uptrend line from the low of October is still intact. Despite the recent weakness in the Nasdaq, the closing price of January 17 put QQQ right at trendline support. Because the trendline is composed of a period of three months, it is more significant than the severe retracement level of the January rally. This offers a low-risk entry in the long side of the Nasdaq because if you buy here and keep a tight stop just below support of the trendline, your potential profits outweigh the risks, thereby creating a positive risk/reward ratio. Note the trendline on the daily chart of QQQ below:

The market is likely to remain choppy with decreasing volume this week unless a big player reports either outstanding or horrible earnings. The market is also very susceptible to Iraq news AND rumors right now, so be on alert when trading and always use your stops. Sooner or later, we’ll get some resolution on the Iraq situation and that will remove much of the uncertainty that has been plaguing the market. But, until that happens, be patient and disciplined in your trading because there is no good reason to be heavily aggressive on either side of the market right now.


Today’s watch list:


QQQ – Nasdaq 100 Index Tracking Stock

Long

Trigger = above 25.45 (above upper channel of intraday downtrend from Jan. 17)
Target = 25.95 (resistance of 20-day MA)
Stop = 25.20 (below low of Jan. 17)

Notes = Just playing the bounce off of trendline support in QQQ. Will look to trail stop if QQQ closes strong.


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:

    MDY short (from Jan. 17) –
    shorted 79.90, covered 79.35 (avg.), points = + 0.55, net P/L = + $52

    RTH long (HALF position from Jan. 16) –
    bought 71.65, sold 70.55, points = (1.10), net P/L = ($57)

Open Positions:

    RTH long (HALF position from Jan. 16) –
    bought 71.65, new stop at 69.90 (below 20-day MA and whole number support), open points = (1.10), open P/L = ($57)

Notes: We sold half of RTH on Friday to decrease risk, but we still like the RTH play because it is above its 20-day MA and has good support just above 70. Because of the reduced risk of only taking a HALF position of RTH (which has a multiplier ratio of 0.5), we are using a looser stop. We are also long a DOUBLE position of BBH, which was called in the ETF Real-Time Room last week, 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
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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