The Wagner Daily | March 14, 2003

Commentary:

On a day reminiscent of the “free-for-all” wild days of 1999, the market had a huge parabolic rally yesterday that took each of the major indices with it. The leader of the rally was QQQ (Nasdaq 100 Index), which closed more than 5.7% higher than the previous day’s close. This was the biggest one-day percentage gain of the year for QQQ and it also put QQQ back to positive on the year. SPY (S&P 500 Index) and DIA (Dow Jones Industrial Avg.) also joined the party and both indexes closed approximately 3.5% higher on the day. Of particular interest was the Semiconductor HOLDR (SMH), which closed nearly 8% higher on the day. Software, Financials, Retail, and Biotechs were also quite strong yesterday. Although every sector we follow closed higher on the day, relative weakness could be seen in Oil Service and Pharmaceuticals, two sectors that typically have inverse relationships to the direction of the tech stocks. Unlike some of the mild rally attempts we have seen lately, nearly every sector in the broad market participated.

So, what sparked this huge rally? Since we are fast-approaching the proposed March 17 Iraqi compliance deadline, one theory is that the market rallied in anticipation of impending closure with the Iraq uncertainty that has been plaguing the market. You know, the ol’ “buy the rumor, sell the news” kind of situation. While there certainly may be some credence to that theory, strong volume, regardless of the reason, was clearly the reason why the market exploded.

If you paid attention to my discussion of volume in yesterday morning’s newsletter, you were already aware of the sharp and sudden increase of volume that we saw on March 12. Because volume is a leading indicator to price, the sudden increase in volume on Wednesday grabbed our attention. The reversal patterns on the daily charts, combined with the strong volume on March 12, were both leading indicators that pointed to a probable uptrending day yesterday, although it was difficult to predict exactly how high the rally would take us because of all the prior overhead resistance on the daily charts. Volume across the board was extremely impressive yesterday. Here are some quick facts to sum it up:

Total market volume for the NYSE was 1.74 billion shares, the highest since December 20, 2002.
Total market volume for the Nasdaq was 1.80 billion shares, the highest since December 20, 2002.
Total volume in the Dow Jones Industrials was 346.6 million shares, the highest since December 20, 2002.
SPY volume was 72.2 million shares, the highest since October 15, 2002.
QQQ volume was a whopping 128.6 million shares, the highest since December 4, 2002.

Based on the volume numbers above, it’s no wonder the market rallied as sharply as it did. As we discussed yesterday, volume is the fuel that makes fires burn. As long as higher than average volume is present in a market, rallies will keep going REGARDLESS of how “overbought” you may think it is.

If you missed the rally altogether or sold your long positions too quickly yesterday, don’t feel bad about it. From a psychological viewpoint, it is real easy to have that happen because the market gets you so conditioned to acting in a certain manner for such a long period of time and then changes the rules without warning the very next day. For example, we have grown accustomed to taking profits quickly on the long side of the market during the past several months because intraday trends have not been following through for more than an hour or two before reversing or going flat. Because the market has been so indecisive lately, the use of intraday trailing stops to let profits ride during the past several months would have resulted in having your trailing stop get hit over and over again without ever locking in profits of more than a few pennies. So, along comes yesterday and our minds are still conditioned, out of necessity, to taking profits quickly due to recent conditions. But out of the blue, the market trends steadily higher the entire day without even a pullback of more than a few cents. Naturally, it is not going to be easy to instantly shift out of the mindset we previously had. Doing so without any confirmation that conditions have actually changed would be equivalent to gambling! Therefore, if you only caught a small piece of the rally and sold your long positions too soon, you should actually feel good knowing that you were sticking to the rules that recent market conditions have mandated. More importantly, if yesterday’s rally is truly going to amount to anything more than a short-lived bear market bounce, there will be plenty more days to take advantage of!

After spending hours studying charts of the major indices after the close yesterday, it became apparent to me that yesterday’s rally in QQQ was VERY important on a technical basis because it caused the Nasdaq to close exactly at resistance of a MAJOR trendline that has marked the downtrend of QQQ for nearly two years. To see this trendline, it is necessary to look at a WEEKLY chart of QQQ, which you will see below:

Because we are looking at QQQ on a weekly basis, it is difficult to determine the exact price at which the trendline meets QQQ, although it looks like QQQ closed slightly above the trendline yesterday. It’s also interesting to note that QQQ is testing this trendline only two months after its prior test in January of 2003. The shorter length of time between subsequent tests of resistance often indicates the resistance is more likely to be broken. Prior to January 2003, it was one full year since the last test of this level.

In addition to this key trendline, QQQ closed 12 cents higher than its 20-week moving average, which is at 25.49. The next key test of resistance is the 50-week MA, which is at 26.02. The bottom line is that the performance of the Nasdaq over the next week will be VERY important to watch. If QQQ breaks the 50-week MA, it will have also confirmed the break of the downtrend that has been in place since May 2001, nearly two years! That could possibly position the broad market to begin a sustained, multi-month rally. However, don’t get too excited yet because we need to get more confirmation than just one strong day that tests the trendline.

Unlike QQQ, SPY and DIA are not even close to breaking their two-year downtrend lines. However, yesterday’s strength in SPY put the index right at resistance of the upper channel of the downtrend from the highs of January 14, 2003. Also, both SPY and DIA are now back above their 20-day moving averages. Take a look at the daily chart of SPY below (DIA looks similar except that it broke the same trendline resistance):

As you can see from our extensive analysis above, the coming week’s performance in the markets will be very important on a technical level.

Going into today, the most ideal situation for intraday traders would be to see an opening gap down, which would enable us to get long on a correction and use a tight stop just below the opening lows. However, it looks like the market is going to open with a large opening gap again. If that happens, the risk of going long the opening gap is VERY HIGH because the market never even saw either a correction by time or price yesterday and today’s opening gap makes it even more extended. If the market opens with a large opening gap, the most likely scenario is that it will trade sideways for the duration of the day and correct by time. However, it may also fill the gap and have a correction by time. That would provide us with an opportunity to go short, but be sure to use a tight stop if you do and don’t get greedy on the short side. Either way, be careful out there because if volume remains strong again today, anything can happen! Remember to trade what you see, NOT what you think!

(As a side note, the front month for the futures contracts changes from March to June. The old symbol was “H” and the new symbol is “M.” If you don’t watch the futures trade, then don’t worry about it.)

Today’s watch list:

We want to see if the opening gap holds before calling any trades. We have several ideas in mind, but we don’t want you to get stuck on a gap that closes or vice versa. We will e-mail an alert if we enter any of them. You can use our SPY, QQQ, and DIA analysis to give you an idea of what we have in mind.

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 = + $163

IWM long (from March 13) –
Bought 69.45, sold 69.77 (avg.),
points = + 0.32, net P/L = + $29

Open Positions:

(none)

Notes: Made a nice profit on SPY from the opening gap and day traded IWM by selling it when it hit our target of 70.15 (although we sold half the position at breakeven, bringing down our avg. sell price).

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