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The Wagner Daily


Despite yesterday’s opening gap down, SPY (S&P 500 Index) and DIA (Dow Jones Average) only sold off for the first two hours of trading before finding support near the lows of January 31 and bouncing into the mid-day doldrums. QQQ (Nasdaq 100 Index), which showed relative weakness for most of the day, also found support after two hours of selling, but actually broke below its January 31 low. All three major indices eventually settled into a narrow trading range for the remainder of the day. Yesterday’s trading action was similar to that of February 3, but perhaps slightly less volatile.

Not much has changed on a technical level with the major indices and yesterday’s light-volume session really did not provide much of a clue regarding short-term market direction. The most significant technical event of yesterday is that QQQ closed below its December 31 low for the first time this year. SPY and DIA, which were already trading below their December 31 lows, once again closed in the middle of their trading ranges from the prior 7 days. The daily charts of all the major indices still look pretty bad as the market is becoming more indecisive. This is evidenced by yesterday’s daily candlesticks that contained narrow bodies and long wicks with the closing prices near the opening prices. The bottom line is that I will begin to sound redundant if I write much more about the current technical state of the market because not much has changed over the past several days and indecision reigns supreme. The good news, however, is that the longer the markets consolidate in a sideways trading range, the greater the move will be when the markets finally break out of resistance or break down below support.

CSCO reported earnings last night that beat expectations by two cents, but provided a cautious outlook for the next quarter due to weakened sales in January. Based on the overnight futures action, there is a lot of indecision of how to interpret their report because the S&P and Nasdaq futures have been quite volatile between yesterday’s 4:00 pm close and this morning. If the tone of the futures session carries through into today’s regular trading session, be prepared for another day of choppiness. More importantly, Secretary of State Colin Powell presents a key speech on Iraq today (tentatively scheduled for 10 am EST). While I am nearly certain the tone of the speech will be aggressive towards attacking Iraq, I am not very certain how the markets will react. If enough fear is injected into the markets, we could see a broad-based selloff. However, the markets are just as likely to interpret his speech as a positive in the short-term because it will provide more confirmation on whether or not we are going to war. Remember that the markets hate indecision more than the actual negative news events. Therefore, it’s risky to go short purely on the assumption that the markets will tank when he begins his speech. The lowest-risk plan is to sit in cash, see how the market reacts, and follow the trend. That is much less risky than trying to forecast the market’s direction based on Powell’s speech.

Today’s watch list:

SMH – Semiconductor HOLDRS


Trigger = above 21.50 (above yesterday’s high)
Target = 22.05 (resistance of upper channel of downtrend from high of Jan. 13; also low of December)
Stop = 21.25 (below yesterday’s close)

Notes = The semis started to show relative strength yesterday, but the broad market was not. If there is any strength in the market today, we expect SMH to be among the leading sectors. Other than SMH, it was pretty difficult to find any other trade setups offering a positive risk/reward ratio.

The profit target on this trade is pretty small, but the stop is proportionately tighter and keeps our risk/reward ratio at 1:2. We may adjust the target higher, but there is a lot of resistance at 22 right now. We will probably only enter a 1/2 position size of this trade if it triggers (based on the MTG Position Sizing Model).

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).


    SWH short (2/3 position from Feb. 4) –
    Shorted 27.62 (avg.), covered 27.26 (avg.),
    points = + 0.36, net P/L = + $41

    QQQ short (1/2 position from Feb. 4) –
    Shorted 24.06, covered 24.07,
    points = (0.01), net P/L = ($7)

Open Positions:

    SWH short (1/3 position from Feb. 4) –
    Shorted 27.62 (avg.), stop at 28.10,
    open points = + 0.12, open P/L = + $7

Notes: We legged in to SWH short at two different points yesterday, covered 2/3 of the position and took the remaining 1/3 of shares overnight due to relative weakness in the sector. QQQ did not trigger until later in the morning session due to the MTG Opening Gap Rules. Due to the indecision of yesterday’s session, we made the decision to convert the QQQ short to a daytrade rather than trying to catch a big move on the break of daily support. This turned out to be a wise decision given the rally into the close. DIA long obviously did not trigger yesterday. We also netted nearly a point on a BBH short in the ETF Real-Time Room yesterday.

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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