The Wagner Daily


After several consecutive weeks of horrible trading conditions, the market granted us a reprieve yesterday in the form of one of the best trading days we have seen in quite a while. Even though we were quite profitable yesterday, I still would have said it was a good trading day even if we were NOT profitable because good trading days are based on factors totally independent of whether or not you were profitable (although that’s always a nice bonus). There are three main factors that constitute a good trading day: stronger than average total market volume, a smooth and steady trend (either up or down) with retracements of no more than roughly 1/3 of the intraday range, and a wide trading range (decent volatility). The market had all three of these components yesterday as it formed a textbook reversal day.

Going into yesterday morning, we were anticipating a rally day based on a bounce off of the lower channel support of the downtrend from December 9 (reference the annotated chart in yesterday’s Wagner Daily). As such, we went long shortly after the open yesterday in anticipation of the lower channel of the daily downtrend acting as support. However, because it is sometimes difficult to pinpoint exactly when the market will bounce off of a daily support, we were a bit early to the party and were quickly stopped out of our long positions as the market entered into a steady downtrend during the morning session. Rather than reversing sides and going short, we made the decision to go to cash because we did not like the risk/reward ratio of being short considering that SPY and DIA were both pressing BELOW the lower channel support of the daily downtrend line.

As we waited in cash during the mid-day doldrums, we re-assessed and began planning our strategy for the afternoon in the event the market reversed into the close. We then set buy stops to go long SPY and DIA in the event that resistance was broken and the downtrend reversed. We set our buy stops at two different prices so that we could leg into the position with small size and only add to the positions once the market proved we were right. The annotated chart below shows where we placed our buy stop triggers to go long SPY and also where we took profits. The DIA chart looked similar to SPY and we avoided QQQ altogether because it was showing relative weakness to the S&P and Dow:

As you can see from the chart above, our entry points to go long were accurate and our profits wiped out the morning’s losses and caused us to close the day with a solid net profit.

It is important not to confuse what we did yesterday with “bottom fishing.” When you are bottom fishing, which is rarely a profitable strategy over the long-term, you are blindly trying to guess where the market will reverse simply because you feel “the market is way oversold” or because “it simply cannot go any lower.” We’ve all been there at one time or another, but it is a losing proposition over time. Instead, we had several technical reasons why we felt the market would reverse yesterday and we were ONLY planning on going long in the afternoon once the market proved to us that we were right. If the market would not have rallied above its trendline resistance from the high of February 11, we would not have gone long. While we probably would not have gone short either due to a negative risk/reward, we would have simply been patient and waited in cash, even if it meant staying in cash for the rest of the day. Yesterday was clearly an example of how patience pays in the market. By immediately realizing we were wrong with our initial morning entry in the market and then sitting on the sidelines, waiting like a panther for just the right moment to pounce, we were able to turn what was poised to be a somewhat substantial losing day into a profitable day. Furthermore, waiting in cash is always much less aggravating than wrestling with a losing position and it allows you to have a clear head, ready for the next opportunity to come along.

When the dust settled at the end of the day, the major indices each formed bullish hammer candlesticks, a classic reversal pattern, on the daily charts. Although we also saw this same pattern on February 10, yesterday was more significant because of the additional support of the lower channel of the downtrend from December 9 AND the strong volume confirmed the reversal too. The question now becomes “Does it follow through today?”

Because of yesterday’s high-volume reversal day, one would normally expect to see follow-through and continuation of the uptrend going into today. However, there are several factors that could prevent this from happening. First, chief U.N. weapons inspector Hans Blix is scheduled to once again provide an updated report on Iraq. As we have learned over the past several weeks, the market is very news-driven right now and if Blix presents anything the market is not already aware of, it could cause potentially choppy trading conditions. More importantly, today is a Friday and the market is closed for President’s Day on Monday. This means that we will have three very long and potentially tense days in which anything out of the ordinary could happen. Given the current state of affairs with Iraq, as well as the increased domestic terror attack level, I would be surprised if many traders are willing to be long over the weekend. However, depending on the sentiment of the market today, perhaps traders will begin to feel that the oversold conditions of the market make it a worthwhile risk to be long over the weekend regardless of geopolitical matters. I think we will have a better sense for how the market may close after the mid-day doldrums are over, but Morpheus will most likely be cash over the weekend. Therefore, any trades we make today are likely to be intraday because we do not like the idea of being in positions over the 3-day weekend.

The Wagner Daily will not be published on Monday, February 17 due to the markets being closed. However, normal publication will resume on Tuesday. Have a safe and fun holiday!

Today’s watch list:

Because of the three-day weekend and current state of geopolitical uncertainty, we are not recommending any overnight positions today. Instead, we will focus on managing our existing open positions in SPY and DIA from overnight. If we do, however, come across any low-risk setups today, we will e-mail an alert.

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).


    UTH long (from Feb. 13) –
    bought 56.05, sold 57.23 (avg.), points = + 1.18, net P/L = + $115

    SPY long (1/2 position afternoon entry from Feb. 13) –
    bought 81.56 (avg.), sold 82.53, points = + 0.97, net P/L = + $94

    DIA long (1/2 position on afternoon entry from Feb. 13) –
    bought 77.16 (avg.), sold 78.07, points = + 0.91, net P/L = + $88

    SPY long (1/2 position on initial entry from Feb. 13) –
    bought 82.17, sold 81.89, points = (0.28), net P/L = ($31)

    SPY long (1/2 position on second entry from Feb. 13) –
    bought 81.96, sold 81.78, points = (0.18), net P/L = ($21)

    DIA long (1/2 position on initial entry from Feb. 13) –
    bought 77.74, sold 77.30, points = (0.44), net P/L = ($47)

Open Positions:

    SPY long (1/2 position afternoon entry from Feb. 13) –
    bought 81.56 (avg.), will set new stop after open, open points = + 0.79, open P/L = + $77

    DIA long (1/2 position on afternoon entry from Feb. 13) –
    bought 77.16 (avg.), will set new stop after open, open points = + 0.86, net P/L = + $84

Notes: In addition to the trades above, we had a losing trade we closed in RTH, but it was initially called in the ETF Real-Time Room and will be reported in the weekly newsletter.

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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