The Wagner Daily | February 24, 2003

Commentary:

Our analysis from Friday morning’s Wagner Daily anticipated an uptrending day for the major market indices on Friday. While this proved to be correct, the intraday uptrend began with a wild start due to a violent sell off that occurred within the first hour of trading. Although the major indices looked great going into the 10 am EST reversal period, news of an oil refinery fire in Staten Island, NY hit the wires a few minute later and caused the market sell off sharply on fears the fire was terrorist-related. This caused each of the major indices (SPY, DIA, and QQQ) to completely reverse earlier intraday gains and quickly break below their respective three-day lows, “filling the gaps” from the morning of February 18. Shortly after the selloff to the lows of the day, the word on “The Street” was that the fire was NOT terrorist-related and was instead being ruled as an “unfortunate accident.” Undoubtedly, this caused a lot of confusion with traders who dumped their long positions and probably got short a few minutes earlier. As the media continued assuring everyone that the fire was just an accident, buyers stepped back into the market to resume the technical uptrend that was attempted earlier in the morning. The reversal back up to the morning highs forced those who had just gone short to cover their positions, further fueling the rally. After an impressive recovery back to the morning highs, the market resumed its uptrend as if the sharp selloff never occurred in the first place.

Despite the rapid selloff on Friday that initially caused Morpheus to have several consecutive losing trades, we ended the day with a net profit because we quickly cut our losses, went to cash, and re-assessed a new plan for the remainder of the day. This enabled us to “start over” for the day as we properly positioned ourselves for the right signals to occur. When the major indices rallied back to break the highs of the morning, we anticipated a resumption of the initial uptrend, so we bought back into the strongest indices and sectors, used trailing stops to lock in profits, and completely recouped earlier losses by the end of the day. Although Friday’s volatile market action mandated more intraday trading than usual, it was worth the higher commission fees because we turned a losing day into a winning day.

The lesson here is that when things don’t go as planned, which will occur often, the best thing you can do is clear your head by quickly cutting your losses and re-assessing the market from an unbiased point of view. By doing so, you will often be able to recoup your losses by the end of the day because you are able to reposition yourself by not staying stuck in losing positions. Remember that the best traders are those who are able to consistently stick to their trading plans without fear, greed, or other damaging emotions. If a trade is not working and your trading plan calls for closing the position, just get out and don’t give the trade another thought. For many novice traders, this is easier said than done, but it is a crucial skill that must be learned in order to achieve long-term profitability as a trader.

Although technical indicators such as support/resistance, trendlines, and moving averages have been working much better during the past week, Friday morning’s sudden selloff was a reminder that we are still in a very news-driven environment in which ANYTHING can happen without a moment’s notice. While this makes trading slightly higher risk than under less news-driven conditions, the use of mechanical stop loss orders on all positions will always prevent major losses, even when rapid reversals occur. Friday’s uptrend and subsequent closing prices near the highs technically positions the market for more follow-through to the upside over the next week or two. Here is a quick technical assessment of each of the three major indices (SPY, DIA, and QQQ) to help you get a general idea of what to look for in the coming week:

QQQ (Nasdaq-100 Index Tracking Stock) has been showing the most relative strength of the three major indices during the past week. During broad market selloffs, QQQ has been selling off at less of a percentage than SPY and DIA and has been moving the highest percentage during rallies. During Friday’s selloff, QQQ only retraced to its 0.382 Fibonacci level (from the lows of Feb. 13 to the highs of Feb. 18). In addition, QQQ was the only one of the three major indices that actually rallied ABOVE it Feb. 18 high intraday (although it did not stay there). The QQQ weekly chart is only pennies away from rallying back above its 20-week moving average, a key support/resistance level. Going into this week, watch the QQQ daily chart closely for a break above its 50 AND 200-day moving averages. A break above Friday’s high would also represent a break above these moving averages, which would likely propel QQQ up to its next major Fibonacci resistance level around 25.90. Here is the QQQ daily chart:

SPY (S&P 500 Index Tracking Stock) has been the second strongest of the three major indices, not showing as much resilience as QQQ, but showing more strength than DIA. During Friday’s selloff, SPY retraced down to its 0.50 Fibonacci level (from the lows of Feb. 13 to the highs of Feb. 18), while QQQ only retraced 0.382. Although SPY was strong into the close on Friday, it ran into resistance of its February 18 high at 85.80. Keep an eye on that level as a potential double-top or breakout point over the next several days. SPY is still well below its 20-week moving average, but SPY has broken above its 20-day moving average. As such, watch for the 20-day MA to serve as support in the coming week. A break above last week’s high of 85.80 would represent a break above the 0.382 Fibonacci retracement level (from the January high to the February low). If this occurs, SPY should rally up to it 0.50 Fibo retracment level, which is around 87.25. Coincidentally, this also correlates to the December lows. Here is the SPY daily chart:

DIA (Dow Jones Indu. Avg. Tracking Stock) has been the weakest of the three major indices. DIA actually retraced below its 0.50 Fibo retracement level on Friday (from the lows of Feb. 13 to the highs of Feb. 18) and failed to recover as sharply as QQQ and SPY. Not only did DIA not rally back to its Feb. 18 high of 81.05, but it was not even strong enough to break above its previous day’s high of 80.72. Because the Dow is a closely watched index, weakness in this index could put a damper on any further gains in the broad market unless the Dow starts to catch up to QQQ and SPY. Just like SPY, it is well below its 20-week moving average, but is sitting on support of its 20-day moving average. This index has the most overhead resistance on its daily chart and is likely to be the first of the major indices to sell off in the event of broad market weakness (short candidate). On the upside, watch for a break of last week’s highs. Here is the DIA daily chart:

Use the analysis above to give you a clear technical idea of what to expect this week, but remember that news is still the driving force in this market. Volume picked up a bit on Friday, but could have simply been the result of options expiration. Therefore, keep an eye on volume today to see if there is any follow-through. Other than that, remember to always use mechanical stops and TRADE WHAT YOU SEE, NOT WHAT YOU THINK.

Today’s watch list:

QQQ – Nasdaq-100 Index Tracking Stock

Long

Trigger = above 25.40 (above 50 and 200-day MAs)
Target = 25.95 (next Fibo. resistance)
Stop = 25.15 (below Friday’s close)

Notes = See commentary on QQQ above

RTH – Retail HOLDRS

Long

Trigger = above 67.10 (above Friday’s high and 200-MA on 60 min. chart)
Target = 68.60 (resistance of 50-day MA)
Stop = 66.50 (below Friday’s close)

Notes = Retail index showed relative strength on Friday and we expect follow-through today based on break of primary downtrend line on daily chart.

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:

net P/L = + $24

SPY long (HALF position from Feb. 21) –
Bought 84.55, sold 83.88,
points = (0.67), net P/L = ($70)

SPY long (re-entry from Feb. 21) –
Bought 84.61, sold 85.48 (avg.),
points = + 0.87, net P/L = + 168

SPY long (re-entry with HALF position from Feb. 21) –
Bought 85.08, sold 85.26,
points = + 0.18, net P/L = + $6

DIA long (from Feb. 21) –
Bought 79.74, sold 80.29 (avg.),
points = + 0.55, net P/L = + 104

DIA long (re-entry with HALF position from Feb. 21) –
Bought 80.03, sold 80.14,
points = + 0.11, net P/L = + $4

SMH short (from Feb. 21) –
Shorted at 22.64, covered at 22.79,
points = (0.15), net P/L = ($54)

Open Positions:

open P/L = ($9)

Notes: It was a wild day, but we closed with a profit (including trades called in the ETF Room). Took a 1/2 position of SPY overnight and will update you after the open.

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