--> The Wagner Daily

The Wagner Daily


Yesterday was comprised of a rather large divergence between the Nasdaq and the S&P, as exemplified by the Nasdaq Composite closing down only 11 points while the Dow Jones closed down 143 points. QQQ (the Nasdaq) really began to show strength in the early afternoon by rallying off its lows up to the highs of the morning session. However, SPY (the S&P) showed relative weakness and barely even rallied during that same time. This caused the QQQ to form a double top off the morning highs and it eventually started selling off again in sympathy with weakness from SPY. The Nasdaq (and QQQ) maintained its relative strength all the way into the close because it did not break the morning lows until the final fifteen minutes of trading. However, the S&P (and SPY) broke the morning lows by 2:15 pm EST. To quickly determine relative strength or weakness between the S&P and Nasdaq futures, Morpheus uses an overlay chart that looks like this:

When the major indices have divergence as they did yesterday, it often creates “tug-of-war” conditions in which neither breakouts nor breakdowns tend to follow through. Even though SPY eventually won the battle and caused QQQ to drop, the opposite scenario could have happened. If QQQ rallied to new highs in the afternoon, it would have dragged SPY along with it. We bought QQQ and SMH when we noticed the relative strength in the SOX (Semiconductor Index)yesterday because the SOX usually leads the broad market. Although you could have either shorted SPY or bought QQQ, both long and short plays were tricky to sit through yesterday.

Total market volume was light on both the NYSE and Nasdaq yesterday and dropped below both the 5 and 50-day moving averages. When volume drops below the 5-day moving average, it is a red flag that we need to use caution when trading because the market can whipsaw and reverse directions very easily when volume becomes that light, especially given all the Iraq-related rumors that have been swirling around The Street.

From a technical point of view, the market is at a very critical juncture right now because if the major indices do not see a bounce today, they will have broken the lower channel support of their uptrend lines from the lows of October through the lows of December 31. All three major indices (SPY, QQQ, and DIA) closed slightly below their trendlines yesterday, but not enough to provide us with confirmation that the uptrend has been broken. However, if the broad market sells off again today, it will provide us with confirmation that the trendlines have been broken. If that happens, odds of testing the October lows are significantly increased.

I mentioned yesterday that the risk/reward ratio of shorting yesterday was not a good one due to the proximity of the daily trendline support on the major indices and the fact that the market had sold off for three consecutive days. Since yesterday was yet another downtrending day, the risk of shorting today is even greater. If you are not comfortable testing the waters on the long side of the market today, you may want to consider just remaining in cash because the market is technically oversold and due for a bounce, which often comes when you least expect it.

Today’s watch list:

SMH – Semiconductor HOLDRS


Trigger = Above 22.75 OR Below 22.40 (above upper channel of four-day downtrend (also the 40-MA/15 min.) OR on a gap down below yesterday’s low
Target = 23.95 (resistance of 20-day MA)
Stop = 21.85 (below low of Dec. 31)

Notes = The Semiconductor Index started to show signs of life yesterday, but the broad market was weak and prevented SMH from going anywhere. If there is a reversal in the markets today, we expect the Semis to lead the way. We will look to buy either on a break above its trendline resistance OR on any gap down below yesterday’s low. The latter is known as a “fade” and it is the same way that specialists and other professional traders enter positions by trading in the opposite direction of the gap. Given the oversold state of the SOX index, we think that “fading” a gap down in SMH is low-risk and offers a positive risk/reward ratio. We will email an alert with an updated stop if we buy the gap down.

In addition to the SMH setup, we will also be watching for an entry in BBH long. We are already in BBH as a multi-week swing trade, but it could also set up as a potential 1 to 2 day trade if it breaks the upper channel resistance of the prior three days. However, we are not listing it as an “official” buy because we want to assess the market conditions first. We will email an alert if we buy it.

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).


    QQQ long (from Jan. 21) –
    bought 25.47, sold 25.20, points = (0.27), net P/L = ($108)

    RTH long (HALF position from Jan. 16) –
    bought 71.65, sold 69.70, points = (1.95), net P/L = ($101)

Open Positions:

    QQQ long (HALF position re-entry from Jan. 21) –
    bought 25.37, will set stop and e-mail alert after market opens, open points = (0.34), open P/L = ($71)

Notes: We were stopped out of QQQ on the first entry, but we re-entered, sold half the position at breakeven, and took half overnight.

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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