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The Wagner Daily


Well, so much for the “yippee! we caught Bin Laden’s son” rally that reversed the sharp opening gap down in the broad market on Friday. Despite Friday’s closing prices near the intraday highs with decent total market volume, which would point to an opening gap UP the next day, yesterday’s gap down and subsequent weakness in the broad market not only erased the previous day’s gains, but also took out Friday’s lows. This should not, however, be too surprising because the market has been gapping in the opposite direction of what technical analysis would predict each morning. Unfortunately, a majority of yesterday’s selloff in the major indices occurred during the combination of the first 30 minutes of trading, the mid-day doldrums, and the final 30 minutes prior to the close. Because of the associated volatility of trading during these times of the day, our trading plan typically prevents us from entering new trades during these periods.

The biggest thing we noticed about yesterday is that volume continues to be extremely light. In fact, the total market volume in the Nasdaq yesterday was only 1.11 billion shares, the lightest volume day we have seen since December 30, 2002. That means that the current trading volume in the Nasdaq yesterday was on par with volume over the Christmas holiday period, typically the slowest week of every year! Obviously, yesterday’s total market volume in the Nasdaq was well below its 5-day moving average as well, indicating a sudden drop in near-term trading interest. Volume in the NYSE, while not the lowest day of the year, was not much more impressive. What happens when volume is so light, as it was in the Nasdaq yesterday? Usually nothing! If you look at an intraday chart of QQQ yesterday, you will notice that it stayed in an extremely narrow 12-cent trading range from about 10:30 am until 3:30 pm EST. That’s five hours of nothingness that would put even a caffeine-charged trader to sleep. Furthermore, light volume days are dangerous for intraday trading because any trend that develops can reverse rapidly and without warning if big money suddenly steps in on the other side of the trend. In the case of yesterday, that did not happen, so the market kept drifting lower throughout the day. However, we have found that the risk/reward ratio of trading in such a low-volume environment is not good. It’s much less risky and more profitable to be in cash during those periods.

The bad news is that volume is likely to remain low through the rest of this week because institutions and other “big money” are waiting until the proposed March 17 deadline for Iraq to comply with U.N. demands before heavily entering new positions. The good news, however, is that we have the ability to patiently wait and not be in the market if conditions are not right. The bottom line is that big players are sitting on the sidelines in cash because there are too many variables that could determine the near-term direction of the market. Therefore, by sitting in cash, they can be ready and waiting to take positions on either side of the market, depending on how the major indices react to the Iraqi situation. The so-called “smart money” got its name for a good reason — institutions and other big players tend to consistently make money in the markets because they have a lot of information and resources available to them. But, if they are confused to the point of not knowing which side of the market to be on, my question to you is “Are you too anxious to be in the market right now?”

If you are an experienced trader who has been doing this for years, chances are that you are well-disciplined and patient enough to wait until volume picks up and the market returns to being more technical-driven than news-driven. However, my concern is that new traders are focused too much on looking for individual trade setups every day, always wanting to be in the market, but are missing the big picture. Unless you know for certain whether or not the U.S. is going to war with Iraq and what the potential outcome will be, it is my personal opinion that you should be in no hurry to be in the markets right now. Instead, focus on preserving your capital by sitting patiently in cash until numerous factors line up to increase the odds of making profitable trades. Remember that the market has been here since you’ve been born and will continue to be here tomorrow, the next day, and probably as long as our country exists! Now that I got that out of my system, let’s take a technical look at each of the major market indices. . .

DIA (and the Dow Jones Industrial Average) has been the weakest of the three major indices we follow. Unlike SPY and QQQ, DIA closed below its February 13 low and formed both a new intraday and closing low of the year yesterday. In fact, DIA is quickly closing in on its October 2002 lows. It is well below all of its major moving averages on the daily chart and its next price support is not until the lower channel support of the downtrend line from the low of December 2002. Here is a daily chart of DIA:

SPY (and the S&P 500 Index) has been showing slightly more relative strength than the Dow, but is not holding up as well as the Nasdaq. The biggest difference between SPY and DIA is that SPY held onto the February 13 lows yesterday, which could possibly cause the broad market to bounce today in anticipation (even if short-lived) of a double bottom. However, if the February 13 low is broken in SPY, it’s “hello October lows.” My personal opinion is that SPY will stay in a choppy and narrow trading range at least through the rest of this week, but we will be ready to short if it does indeed break to a new low of the year. Here is a daily chart of SPY:

QQQ (and the Nasdaq 100 Index) has been the strongest of the three major indices and is the only one still relatively near its 20-day moving average and well above its February 13 low. This is due largely to the fact that the Biotech index (BBH is the HOLDR) has been showing relative strength to the broad market. The semis have been doing okay too. However, if we begin to see weakness in either of those two key sectors, you will probably see QQQ lose support at 24.00 and drop to test the February 13 lows just like SPY right now. If the volume is decent, I would consider shorting QQQ below yesterday’s low, but only if volume picks up at least to its 5-day moving average. Here is a daily chart of QQQ:

Going into today, we don’t have high expectations of positive trading conditions because volume will probably once again be very light. The way to combat that is either to stay out of the market or trade with reduced share size and use tighter stops. Finally, remember to trade what you see, NOT what you think! Good trading to you. . .

Today’s watch list:

QQQ – Nasdaq 100 Index Tracking Stock


Trigger = below 23.90 (below yesterday’s low)
Target = 23.35 (Feb. 13 low)
Stop = 24.13 (above yesterday’s close)

Notes = Setup discussed in commentary above.

SMH – Semiconductor HOLDR


Trigger = HALF below 21.85, HALF below 21.75 (below yesterday’s low, then add shares below March 7 low)
Target = 20.85 (low of Feb. 14)
Stop = 22.25 (20-MA/60 min.)

Notes = Semiconductor sector looks similar to QQQ right now and could drop pretty hard if it breaks the two-day lows.

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).



Open Positions:


Notes: Because of yesterday’s weakness in the broad market, none of yesterday’s long setups in BBH, UTH, or SPY triggered. As such, there are no new trades to report from yesterday.

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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