The Wagner Daily

The Wagner Daily
March 4, 2003

Commentary:

Despite several excellent technical setups on the long side going into yesterday morning, the major market indices once again failed to follow-through with solid daily chart patterns. In particular, QQQ and SMH, both of which broke major resistance yesterday morning, quickly reversed and not only gave back early morning gains but completely retraced all of Friday’s range to close below Friday’s lows.

After the market opened yesterday, QQQ had broken out above both its 50 and 200-day moving averages, its 20-week moving average, Fibonacci resistance, and its highs of the past two weeks. This was on top of a multi-week volatility contraction that pointed to an imminent break one way or the other. Based on all these confirming factors, it seemed to be nearly a no-brainer to buy QQQ yesterday morning. The SMH daily chart also looked very bullish coming into yesterday after breaking price resistance of the highs of the past month with strong volume on Friday. But, even though the odds of two profitable trades were strongly in our favor yesterday morning, the market surprised a lot of traders, including myself, when it quickly and sharply reversed after the ISM number was released at 10 am EST. This prompted a selloff that not only filled the gap and dropped into Friday’s range, but eventually the major indices broke BELOW and closed below Friday’s lows.

Obviously, we were stopped out in our QQQ and SMH swing plays that we attempted, but we felt pretty good about it because we stuck to the plan and were disciplined by taking the stops as planned. Had we not maintained discipline to stick to our initial stop loss strategy, the losses would have been nearly three times as large. Remember that successful traders over the long-term do not worry about whether each trade was profitable or not. Rather, they maintain 100% of their focus on sticking to their trading plans each and every time they enter a trade. They realize they are likely to achieve consistent long-term profitability as long as they have a precise position management strategy in place, which is why we use the MTG Position Sizing Model. Always judge your trading performance at the end of each day not by whether you gained or lost money, but rather whether or not you had a solid reason for entering the trade and were disciplined in sticking to your exit strategy. If you do that consistently, it won’t matter whether you win or lose on any given day because you will succeed over the long-term.

Yesterday’s bearish market action caused numerous “engulfing” candlestick patterns to be formed on daily charts of the major indices, as well as many industry sectors. An “engulfing” pattern is a bearish candlestick chart pattern that occurs when 1.) The color of the first day’s body reflects the trend (although it could be a doji) 2.) The second day’s real body engulfs (covers) the first day’s body. In this case, the market formed a bullish candle in the direction of the four-day uptrend on Friday, and also broke above some key moving average resistance levels. Yesterday, the market subsequently opened above Friday’s highs, but eventually sold off to close BELOW Friday’s lows. This “bearish engulfing” pattern often points to a reversal in the direction of the trend because it traps many of the bulls who were anticipating a continuation of the trend. The daily chart of SPY below illustrates this “engulfing” pattern (QQQ and DIA also had the same pattern):

Although the market has essentially been stuck in a relatively narrow trading range during the past several weeks, an uptrend had begun to form on the hourly charts, which began with the February 25 lows. However, yesterday’s selloff caused the major indices to break below support of that uptrend line. This once again puts the major indices such as SPY, DIA, and QQQ back into “no-man’s” land, meaning the middle of the daily trading range. Although the uptrend from February 25 has been broken, there is the lower channel support of a primary uptrend line that began forming from the lows of Feb. 13. The hourly chart of SPY below illustrates this:

Because this support level is just below, it is likely to make shorts a bit tricky here unless you are scalping for quick profits. Based on yesterday’s steep selloff, the most likely action today is a range-bound and choppy market, which would also be a correction by time that allows the intraday moving averages to drop closer to the prices of the indices that fell so sharply yesterday. However, IF the uptrend line from the Feb. 13 lows is violated today, panic could set in and spur another downtrending day that would allow the potential for shorting. But, we do not recommend shorting unless that level is broken first. Unfortunately, going long is equally tricky here because of all the recent overhead resistance that has been created. Therefore, it is entirely possible that the best play today will be cash. We will have a better idea after the market enters the first reversal period around 9:50 am EST. Either way, we recommend you keep your share size smaller than usual because there is no reason to be overly aggressive right now, especially when common technical patterns are failing so frequently.

Today’s watch list:

OIH – Oil Service HOLDRS

Long

Trigger = above 57.75 (above upper channel of downtrend from Feb. 25 highs; also the 20-MA/60 min. chart)
Target = 59.98 (high of Feb. 26)
Stop = 56.40 (below the 200-day MA)

Notes = Oil service sector has been strong and showing relative strength to the broad market during the past month. After finally taking a rest, OIH has now pulled back to support and offers a low-risk entry at this point based on multiple convergence of daily moving average support. Hourly chart looks great also once OIH breaks above 57.75.

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 = ($116)

SMH long (HALF position from March 3) –

Bought 23.71, sold 23.26 (avg.), points = (0.46), net P/L = ($72)

Open Positions:

(none)

Notes: As discussed earlier, both QQQ and SMH were entered yesterday with the intention of being multi-day “swing” trades, but were stopped out when the market sharply reversed shortly after we entered them. We legged into SMH and only had a 1/2 position, which helped reduce the loss. We chose not to take the DIA short when it triggered because the risk/reward was out of proportion in the final hour of trading when it triggered. We were cash overnight.

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

DISCLAIMER: There is a risk for substantial losses trading
securities and commodities. This material is for information purposes only and
should not be construed as an offer or solicitation of an offer to buy or sell
any securities. Morpheus Trading, LLC (hereinafter “The Company”) is not a
licensed broker, broker-dealer, market maker, investment banker, investment
advisor, analyst or underwriter. This discussion contains forward-looking
statements that involve risks and uncertainties. A stock’s actual results could
differ materially from descriptions given. The companies discussed in this
report have not approved any statements made by The Company. Please consult a
broker or financial planner before purchasing or selling any securities
discussed in The Wagner Daily ( hereinafter “The Newsletter”). The
Company has not been compensated by any of the companies listed herein, or by
their affiliates, agents, officers or employees for the preparation and
distribution of any materials in The Newsletter. The Company and/or its
affiliates, officers, directors and employees may buy, sell or have a position
in the securities discussed in The Newsletter and may profit in the event the
shares of the companies discussed in The Newsletter rise or fall in value. Past
performance never guarantees future results.

Deron Wagner

Deron Wagner is a professional trader, author of several ETF trading books, and the Founder of Morpheus Trading Group. Since 2002, he has been sharing his proven swing trading strategy with thousands of traders around the world. He has appeared on CNBC, ABC, and Yahoo! Finance Vision television networks, and is a frequent guest speaker at various global investing conferences.