The Wagner Daily | February 28, 2003

Commentary:

After presenting an ETF workshop at the Online Trading Expo. yesterday morning, I returned to find the market in a narrow sideways trading range that lasted from about 11 am – 2 pm EST. While I was not around to actually observe the morning trading session, it looks like the major indices began yesterday with a small opening gap up that quickly faded down to support of the previous day’s lows as trading approached the 10:00 am EST reversal period. The major indices each found support at the previous day’s lows which sparked a morning rally up to resistance of the previous day’s highs. While both SPY and QQQ held the previous day’s lows during the opening selloff, DIA showed relative weakness by briefly probing below the lows. In addition to the highs of February 26, SPY, DIA, and QQQ each had resistance of their 200-period moving averages on their respective hourly charts. Therefore, it was unlikely that the market was going to break above the previous day’s highs unless volume was strong, which it was not (not a big surprise there).

Upon hitting resistance of the 200-MA/60 min. and the highs of the previous day, the market traded in a narrow sideways range until it lost support around 2:15 pm EST. This caused a small selloff down to the middle of the intraday range, which is where the major indices remained for an hour before rallying back up to the mid-afternoon trading range going into the close.

Although we did not enter any additional “swing” trades, we had a profitable day yesterday through a few intraday trades in the ETF Real-Time Room. As we discussed in yesterday’s Wagner Daily, you really need to be selective, nimble, and ready to switch sides of the market at a moment’s notice in order to profit from intraday trading in the current environment. Yesterday’s trend was similar to the pattern we have been seeing for the past couple of weeks. There was a short tradeable move in the morning session (the rally) and then a contrary move in the late afternoon session (the selloff). Those were the two lowest risk periods for intraday trading yesterday and was hence the only time we were in the market. Our trades yesterday consisted of shorting DIA twice and buying QQQ during the morning breakout. The DIA trades netted a scratch, but we profited from QQQ. The chart below shows our entry and exit points in QQQ:

Going into today, keep an eye on the hourly charts of the major indices. Both SPY and DIA are forming an ascending triangle, a bullish chart pattern, from the lows of February 25. The same could be said about QQQ, but it is a bit choppier. Both SPY and DIA also have support of their 20 and 40-MAs below their current prices on the hourly charts, but they both have resistance of their 200-MAs overhead. QQQ, on the other hand, is actually ABOVE its 200-MA. As you have heard me say in the past, the 200-MA is a very powerful moving average interval that nearly always acts as support or resistance the first time an index runs into that level. In addition, the 200-MA is more powerful on a longer time interval such as an hourly chart than it is on a shorter interval such as a 15-minute chart. In this case, the 200-MA is likely to act as resistance as SPY and DIA approach it, which is likely to happen today. As you can see from the chart below, the 200-MA basically correlates to the upper channel resistance of the downtrend from the high of February 18:

Because of the ascending triangle formation, it is a bit risky to short a rally into the 200-MA. Rather, a better play is probably to wait for an initial test of the 200-MA and then buy any subsequent breakout AS LONG AS VOLUME CONFIRMS THE BREAKOUT. Remember that volume is a leading indicator and breakouts are rarely sustainable without a corresponding increase in volume. So look for a volume spike to confirm any possible breakout. SPY will also be above its 20-day MA if it breaks out, so that will aid in adding support.

As a heads-up, Michigan Consumer Sentiment is scheduled to be reported at 9:45 am EST today and Chicago PMI will be released at 10 am. Therefore, the lowest risk play is to wait until after the numbers are released before entering any new trades for the day.

Today’s watch list:

SPY – SPYDERS (S&P 500 Index Tracking Stock)

Long

Trigger = above 84.80 (above yesterday’s high and the 200-MA/60 min.)
Target = 85.80 (high of Feb. 18, which is also the 0.382 Fibo retracement from Jan. high to Feb. low)
Stop = 84.30 (below yesterday’s close)

Notes = See analysis on SPY in commentary above. Also, remember the MTG Gap Rules before taking a position on an opening gap up to the 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:

(none)

Open Positions:

open P/L = ($37)

Notes: We are still long RTH despite a trade on the third market that briefly touched our stop yesterday (which did not trigger our stop). Again, we recommend a mental stop on RTH instead of mechanical stop due to its wide spread. Also remember to watch $IRH.X throughout the day because the index gives a more accurate picture of true strength or weakness. If you are not already in RTH from the first entry, an entry point today would be a break of 66.60 because we still like like the trade and it is poised to go if it breaks resistance.

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