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The Wagner Daily


After breaking below the December 31 lows last week, SPY (S&P 500 Index) and DIA (Dow Jones Industrial Average) became rather volatile and indecisive on an intraday basis. Most opening gaps (both up and down) have been getting filled at some point during the day and intraday trends have been more tradable in the morning than the afternoon because the final sixty minutes of trading has tended to bring a lot of indecision. Despite the intraday volatility, SPY and DIA closed nearly flat on the week when the dust settled. SPY closed down only 0.3% (32 cents) and DIA closed down 0.7% (56 cents) below the previous week’s close.

I have noticed that QQQ (Nasdaq 100 Index) has been acting in an unusual manner this month. Because QQQ consists of more speculative and “aggressive” stocks, it tends to lead when the broad market rallies by usually rallying several more percent than the more conservative SPY and DIA. As such, QQQ also tends to sell off at a greater percentage when SPY and DIA are in a downtrend. However, this is NOT the trend we have seen so far in the month of January. SPY and DIA both broke below their December lows on January 24 and spent all of last week trading below the December lows. But, with the exception of Friday, QQQ spent the entire week trading in a range ABOVE its December low. On Friday, QQQ finally traded below the December low on an intraday basis, but rallied to close above it. The point I am making here is that the Nasdaq has been showing relative strength to the broad market during a downtrending month. While it is not unusual for the Nasdaq to show relative strength when the broad market is in an uptrend, it is indeed unusual for the Nasdaq to show relative strength when the more conservative “old economy” sectors are in a downtrend. One thing that could explain the relative strength is that QQQ seems to have found support at its 50% Fibonacci retracement level from the lows of October to the highs of December. The chart below illustrates this:

While I cannot be certain what this means for the market, it is something to be aware of because it is unusual to see the major indices reverse roles as they did in January. Perhaps QQQ is just lagging the market and will show relative weakness in February, but it is also likely that the relative strength in QQQ will serve to prop up SPY and DIA because the Nasdaq usually leads. Either way, keep a close eye on QQQ to determine if the relative strength remains or if it was just lagging.

Going into today, a key level to watch is the upper channel of the downtrend on SPY from the high of January 15. This trendline resistance is roughly equal to the high of January 28. The other major indices have a similar pattern. The hourly chart of SPY below illustrates these levels:

If SPY breaks this level, it could trigger a sustained rally that could last for the next week or two. However, a failure to break this trendline means the market probably remains in a trading range or even breaks lower. Notice also the crude looking head and shoulders pattern that has been forming on SPY over the past five days. If last week’s lows are broken, a retest of October lows will probably quickly follow.

Although we could do a very detailed technical analysis on the current state of the markets, the bottom line is that we remain in a very news-driven environment. While the sad news of the space shuttle over the weekend will dominate the media for the next several days, do not forget the very real threat of war with Iraq still exists. Once talk of the space shuttle settles down, news will once again focus on Iraq. Because the market tends to be volatile during times of geopolitical uncertainty, multi-day “swing” trades are higher risk than intraday trades. By their very nature, overnight trades have a higher level of risk than intraday trades, but that also typically equates to higher profit potential, which is not the case right now.

If your trading plan exclusively consists of overnight trades, we recommend you reduce share size and keep stops in place. Intraday trading, while lower risk, has been challenging as well because of intraday volatility and choppiness. Morpheus has been profitable the past couple of days only through being extremely nimble, unemotional, and disciplined. If you do not have each of those three traits, you may wish to sit on the sidelines for a while. But, if you are extremely disciplined and don’t fall in love with either side of the market right now, making consistent profits is certainly possible.

On a final note, be aware that the ISM index is scheduled to be released at 10 am EST today. This number has the potential to be a market mover, so you may wish to remain in cash until after it is released. The forecast is 53.4 and a stronger number than that could spur a rally.

Today’s watch list:

SPY – SPYDERS (S&P 500 Index Tracking Stock)


Trigger = HALF above 86.70, HALF above 87.25 (break of Jan. 28 high, add on break of Jan. 29 high)
Target = 88.00 (resistance of low of Jan. 23)
Stop = 86.20 (below the 200-MA on 15 min. chart)

Notes =
As described in commentary above, we are looking to go long on a break of the high of January 28, which is also the trendline resistance from the highs of January 15. We will add to the position on a break of the January 29 high.

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 short (HALF position from Jan. 31) –
    Shorted 24.33, covered 24.24 (avg.),
    points = + 0.09, net P/L = + $12

    SWH short (HALF position from Jan. 31) –
    Shorted 27.60, covered 27.40,
    points = + 0.20, net P/L = + $17

Open Positions:

    SWH short (HALF position from Jan. 30) –
    Shorted 28.73 (avg.), stop at 28.50,
    open points = + 0.83, open P/L = + $80

Notes: We are still short a HALF position of SWH from Jan. 30, although we added to it and covered part of it on Friday. This is known as “trading around a position” and is a good technique you can use to maximize your profits on overnight trades by daytrading the position while holding an overnight position at the same time.

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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