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The Wagner Daily


Commentary:

After losing a small pre-market gap in the futures yesterday morning, the major indices opened flat yesterday morning which prompted us to wait in cash on the sidelines until the market settled in. The major indices began selling off shortly after the market opened, with the Nasdaq futures (and QQQ) showing relative strength to the S&P futures (and SPY). The divergence between the major indices became clear when the S&P futures broke below the previous day’s low of 825.30 and eventually dropped as low as 822 within the first hour of trading. However, the Nasdaq futures held the previous day’s low of 951 and formed a double bottom during that same time. Upon closer inspection, we noticed that money was flowing into the SOX (Semiconductor Index), a heavily weighted component of the Nasdaq. Since the direction of the SOX is often a leading indicator to broad market direction and the Nasdaq was diverging from the S&P, we did enter any short positions because we anticipated a reversal.

Our decision to not enter the short side was a wise decision because a broad market reversal rally, fueled by the SOX, ensued shortly after we noticed the relative strength in the Semiconductors. Because the market has been so oversold on a daily basis, we knew the potential for a strong rally, fueled by short covering, existed if the major indices could break above the high of the day. As such, we identified our long entry points based on the break of above the upper channel resistance of the downtrend line from the highs of February 5 for each of the major indices. The first long setup that triggered was SMH (Semiconductor HOLDR) when it broke above resistance of its trendline at 20.60. The chart below illustrates where we bought SMH on a break of resistance:

Shortly after buying SMH, we also bought QQQ and SPY when they broke above their respective trendline resistance levels from the highs of February 5 and pulled back to support. After entering these long positions, the major indices made another leg higher going into 1 pm EST, at which point we took profits on 1/3 of our share size. Although we anticipated the uptrend to continue throughout the afternoon and into the close, we felt it was wise to take profits on partial share size given the recent lack of follow-through the markets have been exhibiting. Unfortunately, the market ran out of gas because volume dried up, and the market broke the intraday uptrend by setting a series of lower highs and lower lows going into 3 pm EST.

Because the retracement in the major indices was more than 50% of the intraday range, the selloff hit our trailing stops on the remaining share size. The net result was a profitable trade in SMH and breakeven trades in QQQ and SPY, although we had a small loss on a 1/2 share size long re-entry of SPY in an attempt to catch the afternoon reversal. Although the intraday retracement was severe, buyers stepped back into the market going into the final 30 minutes of trading, which caused SPY and DIA to close near the highs (QQQ showed slight relative weakness). Since the rally during the final 30 minutes gave us no clear technical entry signals on the long side and was largely due to short covering, we did not re-enter any positions during the final 30 minutes. In all, yesterday was once again plagued with severe intraday retracements that hit our trailing stops, but our trading plan focuses on catching big moves when they occur, which cannot be done if our stops are too tight on trending days. We still made a little profit yesterday and it was nice to finally see the market close positive and near the intraday highs yesterday.

Looking at the daily charts, both SPY and DIA formed bullish hammer candlestick patterns yesterday. This occurs when an index or stock sells off sharply at some point during the day, but reverses to close above the open, at or near the high of the day. The result of this is a candlestick with a solid body, no wick at the top and a long wick at the bottom. This “hammer” formation can be seen on the daily chart of DIA (Dow Jones Average) below:

While the “hammer” pattern often indicates a reversal of a downtrend, it is more reliable and effective as an indicator if the hammer forms at the bottom of a sharply trending selloff. However, because the daily charts have just been sort of unemphatically drifting lower over the past couple of weeks, the reliability of the “hammer” with regard to indicating a trend reversal is sufficiently diminished. More importantly, remember that the major indices each formed bearish “engulfing” candlesticks on February 7, just one day prior. A bearish “engulfing” candlestick occurs when an index or stock opens above the highs of the previous day, but sells off to close below the low of the previous day. You will see the “engulfing” candlestick if you look one day before yesterday’s “hammer” on the chart above. This is a bearish pattern because it not only traps bulls from the previous day (February 6), but also traps people who bought on February 7 when the market rallied above the high of the previous day.

It is rare to see a bearish “engulfing” candlestick and a bullish “hammer” candlestick back to back on a daily chart, but that is a clear example of what we mean when we have been telling you that the market is very indecisive and erratic right now. On any given day, traders may dump stocks, no matter how oversold they are, and the next day the buyers are in full force. That’s what occurs in the type of news-driven market that we are in and is the reason why it is difficult to take many positions overnight right now.

Based on the yesterday’s reversal day and the rally into the final 30 minutes, we could be positioned for more follow-through to the upside today, possibly as a trending day. However, bear in mind there is a lot of overhead resistance on the daily charts, even from as recently as February 7. Therefore, the extent of the rally and ability for the rally to hold will largely be based upon how strong market volume is. Yesterday’s total market volume in both the NYSE and Nasdaq was not impressive. In fact, yesterday was the lightest volume day the NYSE and Nasdaq have seen since January 3 (although the volume on February 3 was about the same for the NYSE). As such, we need to keep a close eye on market volume today because if volume remains weak, it is unlikely that any rally attempts will be sustained. I would like to see an increase so that today’s market volume is about 120% of the average daily volume of the past 5 days (above the 5-day moving average). Finally, be aware that Greenspan is presenting an economic testimony to the US Congress today and volume is likely to be thin until that is completed. We don’t expect the testimony to have a large bearing on the market, as economics have taken a back seat to the Iraq situation recently.


Today’s watch list:


SMH – Semiconductor HOLDRS

Long

Trigger = above 21.30 (break of downtrend from high of Jan. 13)
Target = 22.20 (high of Feb. 5, which is also resistance of December lows)
Stop = 20.85 (below yesterday’s close)

Notes = The Semiconductor Index began showing relative strength and led the rally yesterday, so we believe there could be follow-through today. If SMH breaks the trendline resistance from the high of Jan. 13, volume should increase and cause a sharp rally to the resistance of Feb. 5

Remember the MTG Opening Gap Rules, which state that we will wait for a break of the 20-minute highs before buying a gap up to our trigger price.


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:

    SMH long (from Feb. 10) –
    bought 20.65, sold at 20.96 (avg.),
    points = + 0.31, net P/L = + $84

    SPY long (from Feb. 10) –
    bought 83.78, sold at 83.82 (avg.),
    points = + 0.04, net P/L = + $2

    SPY long (re-entry with 1/2 position) –
    bought 83.78, sold at 83.50,
    points = (0.28) net P/L = ($31)

    QQQ long (from Feb. 10) –
    bought 24.07, sold at 24.08 (avg.),
    points = + 0.01, net P/L = ($8)

Open Positions:

    UTH long (from Feb. 10) –
    bought 60.02, will set stop after the open and e-mail update, open points = (0.14), open P/L = ($16)

Notes: Although we do not normally share trades from the ETF Real-Time Room with subscribers of only The Wagner Daily, we did so as a courtesy yesterday because most of the trade setups did not present themselves until the middle of the trading day. Sorry about overloading you with e-mail, but wanted to give you a heads-up with regard to what we were doing in the 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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