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The Wagner Daily


Psychologically, last Friday’s market performance was critical to investor sentiment because the most recent selloff took both the S&P 500 Index (SPY) and the Dow Jones Industrial Average (DIA) below their respective closing prices of December 31, while the Nasdaq Composite closed just 7 points above its December 31 close. The 2.65% drop in the Dow Jones on Friday was also the largest percentage point drop the index has seen since October 9, when it dropped 2.86%. All three major indices are now well below their uptrend lines from the lows of October and are also each below their 20, 50, and 200-day moving averages. The benchmark S&P 500 Index has closed negative in six out of the last seven days, losing 7.5% during that seven-day period. Anyway you look at it, the market is just plain ugly right now!

Going into today, each of the major indices remain very oversold on a technical basis and are each well below their intraday moving averages. While this means that the market could easily snap back rapidly and without warning, bear in mind that oversold markets often become more oversold as panic begins to set in. This makes both buying and shorting equally dangerous here. As you probably already know, there are two major events happening over the next two days that will likely determine the near and intermediate-term direction of the markets. Chief UN Weapons Inspector Hans Blix is scheduled to speak later today and provide an update on weapons inspections in Iraq. Combined with Secretary of State Powell’s comments over the weekend, the speech will largely determine whether a war with Iraq will occur sooner rather than later. Second, Bush will provide a State of the Union address on Tuesday evening that will likely address the Iraq situation.

Without a doubt, trading will be very dangerous over the next two days because anything could happen (never assume it cannot). While it is likely that any negative Iraq comments will add further selling pressure on the markets, don’t make the mistake of automatically assuming the market will tank. Over the years, I have seen so many situations where the general public assumes a negative market reaction will occur and the market does the exact opposite because much of the bad news was already priced into the market. After the start of the Gulf War in 1991, the market actually rallied rather strongly because there was no longer the fear of the unknown. It was the inverse scenario of the classic tagline to “buy the rumor and sell the news” because investors sold the rumors and bought the news. Although history often repeats itself, it is dangerous to blindly assume the markets will follow the same pattern the second time around because there are many more variables and less international support involved this time. As if the events above are not enough reason for caution, there are is also a plethora of economic data that will be released later this week (click here for a calendar).

Needless to say, Morpheus is strongly recommending caution with entering any new trades over the next several days and is shifting into “PMC mode,” which stands for Preserve My Capital. This means Morpheus will be incredibly selective with regard to entering any new trades. In addition, Morpheus will be reducing standard share size, and taking profits or cutting losses on any new trades very quickly. Both novice and advanced traders might both consider staying out of the market altogether for the next two days because it is purely speculation as to how the market will react. My personal opinion is that it will be volatile and whippy in both directions, further increasing the challenge.

Perhaps the most important thing I have learned in all my years of trading and talking to other successful traders is that the traders who are most consistently profitable on a monthly basis are those who are wise enough to know when to be out of the markets altogether. While many novice traders get bored with being in cash and want to “see some action,” I can assure you that those who lack a deep and sincere respect for risk will not survive in this business for long. Morpheus, on the other hand, is not concerned about being in the markets every day because we realize that sometimes the most money to be made is done by sitting on the sidelines. The reality is that a few days of being in cash is nothing in the scheme of a whole lifetime of trading. Let that serve as a reminder to not overtrade moving forward this week. Once some of Iraq indecision is resolved, technical indicators will begin working again and trading should become easier. However, let’s not focus too much on technicals right now because they often go “out the window” in the face of significant news events.

Today’s watch list:

As discussed above, Morpheus is shifting into PMC mode for the next several days. After hours of scanning and researching over the weekend, Morpheus was unable to find any low-risk trade setups that offer a very positive risk/reward ratio. If, however, any are found intraday, an email will be sent with details of setup.

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).



Open Positions:


Notes: The PPH setup did not trigger on Friday, so there are no open or closed Wagner Daily positions to report. MTG’s only open position is a long position of BBH that was called in the ETF Real-Time Room several weeks ago.

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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