The Wagner Daily


Despite the bullish reversal action of Friday, February 21, the major indices were not able to either sustain the gains or follow-through to the upside yesterday. All other factors considered, light total market volume was once again the biggest problem because major institutions and traders continue to stay on the sidelines, “waiting for something to happen.” The lack of both selling and buying interest that has been putting the market into a major funk over the past month is still intact.

When the market opened with a small opening gap down yesterday, we anticipated a quick reversal back up to fill the gap based on the fact that Friday’s reversal day closed near the highs. While QQQ (Nasdaq 100 index) did exactly that, there was broad market divergence due to weakness in DIA (Dow Jones Indu. Avg.) and SPY (S&P 500 Index). This divergence created a tug-of-war that made it difficult to know whether to be long QQQ and SMH (two ETFs that showed the most relative strength) or whether to be short DIA and SPY (two ETFs with the most relative weakness). We chose to be long QQQ and SMH (called in the ETF Real-Time Room) because we liked the relative strength that QQQ and SMH have been showing over the past week (on the daily charts) and anticipated a breakout yesterday. This was especially true in SMH, which had been consolidating at the highs for a week and briefly broke to a new high yesterday. Because the Semiconductor Index (and SMH) usually leads the market, and not the other way around, we anticipated the Semis to drag the rest of the broad market higher as well. But, just like in boxing, the anticipated “favorite” does not always win the fight and the weakness in DIA and SPY won the tug-of-war yesterday. This eventually caused both QQQ and SMH to lose their relative strength as DIA and SPY set new lows. The overlay chart below, one of the primary charts we use to look for divergence between the major indices each day, clearly illustrates the divergence between the S&P and Nasdaq futures (and SPY/QQQ). The black line is the S&P futures and the green line is the Nasdaq futures:

Because QQQ and SMH did not lose their relative strength and establish an intraday downtrend until after entering the mid-day doldrums, we did not participate in shorting the morning weakness. Although we were prepared to short the afternoon session, each of the major indices entered into a choppy, sideways trading range instead of resuming the morning downtrend. As such, we stayed in cash the rest of the day.

Yesterday’s failure to sustain Friday’s gains and subsequent close near the intraday lows was bearish because it confirms that the highs of February 21 were a double top that marked a resistance point rather than the start of consolidation for a breakout to higher prices. The inability of the market to rally beyond the February 21 highs also means that the major indices were unable to rally beyond the 0.382 Fibo retracement from the January highs to the February lows. This is bearish because a retracement (bounce) of less than 0.50 of the most recent selloff usually means the current market trend (which is down) will resume and probably lead to lower prices. Further, take a look at the daily chart of QQQ and notice how the 200-day MA acted as rock-solid resistance, as it often does.

Before you get too excited about blindly shorting, there are a few potentially conflicting bullish signals that you need to be aware of. Primarily, the major indices have only retraced 0.50 (50%) of the most recent rally from the February 13 lows to the Feb. 18 highs. This means the market COULD find support in this current range. In fact, the Nasdaq has not even retraced 0.382 of the rally yet! One look at the daily charts also confirms that the major indices could easily go either way from here. Therefore, we feel caution is in order on BOTH sides of the market over the next several days.

Much of the action today will likely be driven by the market’s reaction to the new Iraq resolution that the U.S. and Britain presented to the UN behind closed doors at 3:30 pm EST yesterday. Because that did not occur until 30 minutes before the close, we are likely to see the real reaction to that news today because we remain in a news-driven environment. As of the time of this writing (6:00 am EST), there is a significant gap down in both the S&P and Nasdaq futures. If the gap down holds through the first reversal period around 10:00 am EST today, odds are decent that the market will resume the downtrend that began yesterday. However, we feel a more likely scenario is that we see a range-bound, choppy day because the market is in “no-man’s land” and we do not anticipate volume increasing today, which is necessary to provide a steady trend. The reality is that we cannot find any good reason to be in a rush to make an abundance of new trades right now given the technical state of the market and the continuing geopolitical (there’s that word again) uncertainty. Finally, remember to use the MTG Opening Gap Rules in order to minimize the risk of selling short into the large opening gap down.

Today’s watch list:

SMH – Semiconductor HOLDRS


Trigger = below 22.65 (below yesterday’s low)
Target = 21.95 (200-MA/60 min. support; also filling of the gap from Feb. 14)
Stop = 22.95 (below Friday’s close)

Notes = The Semis have been showing a lot of relative strength over the past week, but started to show weakness yesterday with the broad market. We are anticipating more follow-through to the downside in this sector today due to rotation out of the Semis and back into more defensive sectors. SMH will likely gap down below the trigger on the open, so remember to use the MTG Opening Gap Rules, which basically states we will wait for a break of the 20-minute lows before shorting the gap down.

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).


    QQQ long (HALF position from Feb. 24) –
    Bought 25.19, Sold 25.09,
    points = (0.10), net P/L = ($26)

    SPY long (HALF position from Feb. 21) –
    Bought 85.24, Sold 84.38,
    points = (0.86), net P/L = ($89)

Open Positions:


Notes: The SPY swing trade was stopped out due to lack of follow-through on Friday’s reversal, but capital loss was relatively minor due to only having 1/2 position size. We lowered the trigger price to buy 1/2 position of QQQ yesterday, it triggered, and we were stopped out when the breakout failed. Again, we legged in with only 1/2 position and kept losses tight. RTH did not trigger.

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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