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The Wagner Daily


Commentary:

Well, so much for continuation with an uptrending day off the strong close of February 10. What began as a decent start to a technical uptrending day, buoyed by positive comments by Greenspan, was once again overshadowed by news regarding the Iraq situation, this time in the form of an audiotaped statement by Bin Laden. As a result, all the major averages relinquished early gains and SPY (S&P 500 Index) and DIA (Dow Jones Average) both eventually closed near the lows of the previous day. Without a doubt, yesterday’s action was also the result of the conflicting bearish engulfing and bullish hammer candlesticks on the daily charts that we spoke about in yesterday’s newsletter. Indecision in the markets often breeds more indecision.

Each of the major indices (SPY, QQQ, and DIA) began the day with an opening gap above the previous day’s high. As the MTG Trading Plan mandates, we waited the first 30 minutes to see how the market acted going into the 9:50 to 10:00 am reversal period. Typically, if a gap is going to be filled, it will often occur within the first thirty minutes of trading. After the first thirty minutes of the day, we spotted relative strength in the Nasdaq, fueled by strength in the SOX (Semiconductor Index). Since the SOX tends to lead the market and the Nasdaq usually leads the S&P, we bought 1/2 positions of both SMH and QQQ on the first minor pullback because those were two ETFs showing the most relative strength to the broad market.

By 11:00 am EST, our positions started looking better as the Nasdaq futures broke the high of the morning. However, we became suspicious of the rally going much higher because the S&P futures formed a double top off the morning high rather than breaking out to new highs when the Nasdaq did. Upon the S&P futures confirming its relative weakness, we made the decision to take profits on 1/2 the shares of our SMH position and raise the stops to breakeven on the remaining shares, as well as all the shares of QQQ. This was a wise move because the market collapsed by 12 noon, led by SPY and the S&P futures.

Although the market entered into a steady downtrend that lasted into the close, we interpreted going short to be just as risky as going long for two reasons. First, the consolidation period at the highs of the previous day was likely to act as support, making it difficult for the market to immediately give back the previous day’s gains. Second, the major indices had support of the lower channel of an uptrend line that began to form off the low of the previous day. Once both of these support levels were broken, the market made another leg lower, but the congestion of support from the previous day did not justify a positive risk-reward ratio in this environment of indecision. The 15-minute chart of QQQ below illustrates the two support levels. The charts of SPY and DIA also look similar except that they closed closer to the lower end of the previous day’s range:

Overall, yesterday was a profitable day for us because of the SMH trade. We certainly did not knock the ball out of the park, but my opinion is that if you can consistently make ANY profits or even stay close to break even in this difficult environment, you’re doing better than most traders out there. While that may not be the positive news you want to hear, it is reality because we do indeed remain in an extremely challenging environment that reverses at a moment’s notice based on any geopolitical news. Remember, your PRIMARY GOAL right now needs to be PRESERVATION OF CAPITAL! If you can survive in this environment, you will be all the stronger of a trader when conditions eventually improve.

Going into today, there are a handful of companies that reported earnings and may have a bearing on the market action. The big boys who reported earnings were GM, KO, and AMAT. Although we do not trade individual stocks, it is often helpful to watch the key, news-driven large-cap stocks because they often set the tone for the rest of the market. For example, even though SMH (Semiconductor HOLDRS) showed relative strength yesterday and could easily follow-through today, the earnings report from AMAT (Applied Materials) is receiving a negative response from the market and is trading down significantly in the pre-market. As such, that will probably affect the possibility of SMH showing strength today because AMAT is a heavily weighted component of that ETF.

From a technical basis, we once again reiterate that the market is primarily news-driven right now and technicals have been taking a back seat. Therefore, we caution you against putting too much creedence in the tried and true technical signals and indicators that work in approximately 95% of all market conditions. Failure to recognize the recent shift from a technical to a news-driven market could result in substantial losses if you rely strictly on technicals. As we have said before, the best way to play a news-driven market is to either sit on the sidelines and wait (a pretty good idea) OR shift into a mode of taking profits very quickly and using even tighter stops (riskier, but has the potential to yield small profits).

If I had to pick a key technical level to watch today, it would be the triple bottom that SPY and DIA have both set over the past three days. Although both of these indices seem to be finding support, a break of the 3-day lows could result in panic selling and a broad selloff because many people are still anticipating a bounce off of oversold conditions. If that does not happen soon, panic selling could easily set in. However, QQQ is showing relative strength and actually closed in the middle of the range of the prior three days. This could serve to prop up the market, though the most likely scenario is that we continue to see choppy and erratic trading conditions because the market is now in “no-man’s land,” trapped between intraday price support and resistance. Remember to always trade what you see, NOT what you think!


Today’s watch list:


DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)

Short

Trigger = below 77.95 (break of three day lows and whole number support of 78)
Target = 76.55 (low of October 11)
Stop = 78.60 (above price resistance at 78.50)

Notes = Though there is a good chance that this setup will not trigger today, we want to make sure we are short if the Dow does indeed break the three-day lows. However, as we have been doing, we are likely to only take a partial share position.


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 (1/2 position from Feb. 11) –
    bought 21.12, sold at 21.33 (avg.),
    points = + 0.21, net P/L = + $27

    UTH long (from Feb. 10) –
    bought 60.02, sold 60.02, points = n/a, net P/L = ($3)

    QQQ long (1/2 position from Feb. 11) –
    bought 24.40, sold at 24.42,
    points = + 0.02, net P/L = ($4)

Open Positions:

    (none)

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

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