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The Wagner Daily


Commentary:

Trading action on most Fed days tends to be similar in that there is typically a morning “anticipation” rally that lasts until about 12 noon to 1:00 pm. From that period until the FOMC decision on rates at 2:15 pm, the market usually pulls back and corrects a bit. However, yesterday’s action was the opposite of most Fed days in that the morning began with weakness in the form of a large gap down and then a narrow trading range from the open until about 12 noon. Rather than showing weakness during the mid-day doldrums, the market actually broke out of the trading range and set new intraday highs around 12:30 pm and rallied for the next hour leading up to the FOMC decision, with a slight pullback right before the 2:15 pm Fed decision to leave rates and bias unchanged. After the 2:15 Fed announcement, the market initially reacted very uneventully before making one more leg up into the final ninety minutes of trading.

Because yesterday morning’s volume was so light and the market was not acting as it typically does on Fed days, we chose not to participate in yesterday’s trading session with the exception of two quick long scalps in the ETF Real-Time Room. There were a few sectors such as PPH (Pharmaceutical HOLDRS), RTH (Retail HOLDRS), and SMH (Semiconductor HOLDRS) that showed relative strength yesterday, but trading for anything more than a scalp on a Fed day is usually not advisable, especially when the market is not acting as it typically does on a Fed day.

The one positive about yesterday is that the market’s ability to recover from the opening gap down and subsequent rally after the FOMC decision confirms what we have been speaking of for the past several days — the market is reacting positively to the fact that we are probably going to war with Iraq. Remember that it is not a pending war that is a positive for the market, but rather the elimination of indecision. As we have been saying, the market hates indecision and each passing day has been eliminating more indecision about whether or not the U.S. will attack Iraq.

Looking forward to the next several days, we would not be surprised to see another day or two of higher prices because yesterday was only the third day of higher closing prices in more than two weeks of selling. Yesterday’s double bottom off the lows of January 27 and subsequent rally above the highs of that same day indicates a bullish reversal pattern. In addition, the daily charts of the major indices (especially SPY and DIA) are each showing more upside potential is possible before running into any major moving average resistance. The hourly charts give us a clear view of the trendline resistance that was broken and also where the major indices are likely to run into resistance again. I have labeled an hourly chart of SPY below:

The first trendline (in red) began with the highs of January 23 and connected with the highs of January 28. This was the primary resistance going into yesterday morning, which was subsequently broken around 12 noon. The next trendline resistance (in green) was from the highs of January 16 through the highs of January 23. This resistance was broken late yesterday afternoon. The next trendline resistance that SPY will face is from the highs of January 15, connecting with the highs of January 16 (in blue). Remember that the longer the time horizon of a trendline, the more the trendline will act as support or resistance. Therefore, it will probably take a lot of volume and momentum to push through the next trendline. Also keep in mind that when an index or ETF breaks a resistance level, that former resistance level becomes the new support level. Therefore, the two trendlines that were broken yesterday will probably act as support going into today. You can also draw similar trendlines on both QQQ and DIA.

Finally, one other indicator that is useful in determining how high a market will bounce while in a downtrend is Fibonacci. The hourly chart of SPY below illustrates this:

Notice that the 0.382 Fibonacci resistance is around 88.00, which equates to the lows of January 22 and 23. Since there is convergence of the 0.382 Fibo retracement and the trendline discussed above (just below 88), expect the 87.50 to 88.00 area to serve as important resistance on SPY, with the 86 – 86.50 area acting as support. For DIA, the 0.382 Fibonacci resistance is just over 83.10, while the 0.382 Fibo resistance for QQQ is just over 25.50.

Because SPY and DIA have been more oversold than QQQ in recent weeks, we expect more upside potential in those indices than the Nasdaq. Remember to also watch for increasing volume as confirmation of more follow-through to the upside. While our short-term bias is to the upside, we are cautious about aggressive buying at current levels. The primary trend on all the charts is still down and the market could start heading back down again at any time, depending largely on geopolitical factors.


Today’s watch list:


RTH – Retail HOLDRS

Long

Trigger = above 66.80 (above resistance of downtrend line from high of Jan. 21)
Target = 67.80 (just above low of Jan. 23)
Stop = 66.30 (below support of same trendline from Jan. 21 high)

Notes = We did not buy RTH yesterday due to the large opening gap down and high trigger price. However, we still like this set up and it is actually lower risk today now that RTH has confirmed the reversal yesterday. We expect at least one to two days of follow through off of yesterday’s bounce.



SWH – Software HOLDRS

Short

Trigger = below 28.20 (below daily price support)
Target = 27.05 (just above Dec. 31 lows)
Stop = 28.70 (above yesterday’s close)

Notes = This sector has had relative strength and has therefore held up during the market’s selloff. However, if the market cracks again, we expect SWH to catch up to the rest of the market. If not, it will probably not trigger and that’s okay too.


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:

    (none)

Open Positions:

    (none)

Notes: RTH had a large opening gap down, which significantly decreased the risk/reward ratio of going long if it hit the original trigger price. We therefore cancelled our buy trigger on RTH yesterday (as notified per email alert). MTG’s only trades yesterday were a few scalps that were called in the ETF Real-Time Room.

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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