Commentary:

Yesterday was another day of significant divergence between SPY (S&P 500 Index) and QQQ (Nasdaq 100 Index). Once again, QQQ showed relative strength throughout the entire session while SPY was unable to rally. As discussed in yesterday’s newsletter, this type of divergence often creates tricky market conditions because the two indices are not in sync with each other. In the case of yesterday, QQQ was continually trying to pull SPY higher while SPY simultaneously acted as a weight that eventually dragged QQQ lower. The result of this mix was a steady uptrend and gains in the Nasdaq that lasted until the index formed a double top off the previous day’s high around 2:00 pm EST. This resistance level, combined with relative weakness in the S&P, reversed the uptrend in QQQ and began a selloff that continued into the close. Just like the previous day (Tuesday), both SPY and QQQ closed near the lows of the session. Going into the final hour of trading, QQQ held the morning lows while SPY once again set new lows. Although the market reversed its uptrend into the final two hours of trading yesterday, there were actually some decent trading opportunities yesterday because the morning uptrend in QQQ allowed us to utilize and profit from the MTG Trailing Stop Strategy with several long positions. Through the use of trailing stops, we were able to sell our positions near the highs of the day without being concerned about the market’s afternoon reversal.

The market’s inability to hold the gains into the close yesterday was quite bearish because the major indices are now below their uptrend lines on the daily charts, creating overhead resistance of their respective trendlines. This means that any rally attempts we see over the next several days will run into resistance of the trendlines that formerly served as support. Remember that former support becomes a new resistance level once support has been broken. In addition, each of the major indices are now below their 20 and 50-day moving averages, creating additional resistance. Another negative is that the total NYSE volume yesterday was the strongest it has been since the beginning of the year. This means that there were actually a fair amount of sellers yesterday, not simply a lack of buyers. This is further confirmed by the fact that the QQQ total market volume was relatively lighter, despite the strength in the QQQ. From a purely technical point-of-view, the indices could be in serious trouble now unless some major news event comes out to save the market.

Needless to say, the market is now in very oversold territory going into today because of the market’s close on the lows again yesterday, which represented the fifth consecutive down day in SPY. Since it is rare to have more than three consecutive down days without seeing at least a one-day reversal, the five days in a row make it very risky to be short here unless you are looking at a much longer time horizon. There is a pre-market gap up in the futures market today on the heels of some positive earnings reports after the close yesterday. If the gap holds into the first reversal period, it is likely we will see an uptrend remain intact today. We also expect to see some sector rotation back into the Dow and S&P because it has showed relative weakness for the past two days. While we are likely to see a bounce, be aware there is now a lot of overhead resistance out there. Be cautious on the long side and use trailing stops whenever possible to lock in profits.

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Today’s watch list:

SPY – S&P 500 Index Tracking Stock

Long

Trigger = Above 89.05 (above upper channel of five-day downtrend (also the 40-MA/15 min.) OR on a gap down below yesterday’s low
Target = 90.05 (resistance of daily trendline from October lows)
Stop = 88.55 (below 20-MA on 15 min.)

Notes = Just playing the bounce discussed in commentary above. Remember the MTG Gap Rules so you don’t get stuck buying at the high of the day.

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SMH – Semiconductor HOLDRS

Long

Trigger = Above 23.05 (above resistance of two-day high)
Target = 23.90 (resistance of the gap from Jan. 16)
Stop = 22.60 (below 20 and 40-MA on 15 min.)

Notes = Just remember the MTG Gap Rules.

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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:

Trades of Jan. 22 (a profitable day) will be reported in next Wagner Daily

Open Positions:

(none)

Notes: Trades of Jan. 22 (a profitable day) will be reported in next Wagner Daily

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)

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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.

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Yours in success,

Deron M. Wagner