The Wagner Daily | January 29, 2003

Commentary:

Although the first half of yesterday was quite volatile and choppy, an uptrend developed in the early afternoon which concluded with the each of the major market indices closing at the highs of the day. As we discussed in yesterday’s Wagner Daily, the market had become so oversold during the past two weeks that odds of a rally attempt yesterday were very high, especially given that the fears of the UN report from Hans Blix was behind us. Interestingly, yesterday was only the second uptrending day we have seen in SPY (S&P 500 Index) since January 14.

All three of the major indices we follow were strong yesterday. However, relative strength could be seen in SPY (S&P 500 Index) and DIA (Dow Jones Industrial Average), while QQQ (Nasdaq 100 Index) lagged slightly due to weakness in the SOX (Semiconductor Index). This was to be expected because SPY and DIA sold off at a larger percentage than QQQ during the past two weeks, so it was likely that they would be the two indices to recover at the largest percentage also. That is why we took SPY and DIA long overnight on January 27, but did not take QQQ. We realized a solid profit on our overnight positions in SPY and DIA, as well as a few other intraday trades made per calls in the ETF Real-Time Room. Nevertheless, yesterday once again required precision position management in order to realize maximum profits because the uptrend was not very smooth.

As you know, this week has been and continues to be filled with a flood of political and economic events. Monday consisted of Hans Blix’ U.N. presentation on the Iraqi weapons inspection, Tuesday consisted of Consumer Confidence and New Home Sales reports in the morning and Bush’s State of the Union address last evening, and today there is an FOMC meeting which adjourns at its usual time of 2:15 pm EST. In addition, there are several important economic reports scheduled to be released Thursday and Friday. The bad news is that the anticipation of each subsequent event adds to the market’s intraday indecision. But the good news is that the passing of each event puts indecision behind us and gives the market a clearer picture of what is happening both economically and geopolitically. Remember that it is not necessarily bad news that the market hates; rather, it is fear of the unknown that cause whippy and difficult trading conditions. This was evidenced by yesterday’s rally, which came after the UN presented a somewhat bleak picture of the Iraq situation. Even though the Blix presentation on Monday, followed by Powell’s “tough talk” later that day, could have been construed as negatives, the market reacted positively because it reduced some of the “unknowns” that have been floating around.

Do you recall when we were discussing the fact that the market held support and did not sell off after Powell’s speech on Monday afternoon? This was a subtle, yet very important hint of a probable upward bias the next day and was one of main reasons we decided to buy SPY and DIA going into the close on Monday and take them overnight, which worked out to be quite profitable. The market often gives subtle clues like that if you can train yourself to sometimes overlook pure technical indicators and look for more subtle signs such as divergence between the market’s price and negative or positive news. In this case, there was bullish divergence between the “negative” news and the market’s positive price action. If you missed that point on Monday, it would have been easy to still be on the short side of the market going into the next day.

Going into today, the pre-market futures are reacting negatively to the State of the Union address last evening. As of the time of this writing (6:30 am EST), both the S&P and Nasdaq futures are poised to open BELOW yesterday’s low. If that happens, there is a good chance it will create a “bull trap” by effectively trapping everyone who bought during yesterday’s rally and held overnight. This scenario could easily cause the major market indices to break support of the January 27 lows due to panic selling from the rally’s inability to sustain its gains for more than one day. However, if the futures recover before the open, the major indices are likely to enter into a trading range. If yesterday’s highs are subsequently broken, we could see another uptrending day. Because of the FOMC meeting which adjourns at 2:15 pm EST today, we expect volume to be light as traders sit on the sidelines. Although no changes to monetary policy are expected, it will probably be difficult to trade after the FOMC meeting due to the large moves and countertrend moves that typically occur in rapid succession after a Fed day. As such, our advice is to stay out of the market after 2:15 pm today.

After the dust from all these economic and geopolitical events begins to settle, trading conditions should gradually begin to improve. This does not mean we will enter into a bull market, but volume is likely to increase, which would bring greater stability and follow-through to the trending days (both up and down). Until then, there is absolutely no reason to be overly aggressive in either the quantity of your trades or in share size. It is unlikely you will miss anything extraordinary over the next several days.

Today’s watch list:

RTH – Retail HOLDRS

Long

Trigger = above 66.70 (above yesterday’s high)
Target = 67.70 (just above low of Jan. 23)
Stop = 66.25 (below yesterday’s close)

Notes = This is simply a bounce play on a break above resistance, just like yesterday’s PPH 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).

Closed
Positions:

net P/L = + $134

DIA long (from Jan. 27) –
bought 80.37, sold 80.97 (avg.), points = + 0.60, net P/L = + $114

PPH long (from Jan. 28) –
bought 71.73, sold 72.38, points = + 0.65, net P/L = + $62

Open Positions:

Notes:

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