The Wagner Daily | March 18, 2003

Commentary:

Our swing trades that we took long over the weekend each worked perfectly yesterday and each one hit and surpassed their price targets all in one day, netting us nearly 6 points of profit. Sure is nice to see technical follow-through return to the market (at least for now). Although we anticipated holding our swing trades for several days to a week, sometimes the market cooperates and trades hit your target much quicker than planned. Based on the negative futures action coming into yesterday morning, it was easy to get a little bit nervous about being long, but we stayed the course by keeping our stops in place just in case we were wrong. Once the MOAR (Mother Of All Rallies) began yesterday, we trailed our stops higher and began incrementally legging out of our positions so that we could be flat going into the mid-day doldrums. The rally was quite parabolic and if you did not catch the first minor retracement around 10 am or have existing long positions from overnight, the market did not provide any low-risk entry points until the bulk of the move had already been made. After the major indices made such a strong move in the morning, the risk/reward ratio of re-entering positions later in the afternoon session was not a good one, so we remained in cash the rest of the day.

Several of our subscribers have sent us e-mail to ask what gave us so much confidence to hold long positions over the weekend, especially with the impending Iraq ultimatum. While we do admit there was perhaps a higher degree of risk because of the geopolitical situation, we accounted for that by only taking 1/2 share size positions. By doing so, we were exposing ourselves to less risk of capital, but still enabling ourselves to realize a nice profit if all went according to plan, which it did. Most importantly, it was a very calculated risk that offered a good risk/reward ratio, as discussed in our extensive analysis on Friday afternoon. Just to make sure it gets drilled into your head, do you remember the biggest single technical indicator that made us believe we would see more follow through to the upside after Friday? High volume! Without the huge increases in volume we saw in the latter half of last week, which indicated much more than just a “short covering rally,” I would NOT have taken those positions long over the weekend.

Although I have been discussing the importance of volume every day for the past week, it is so crucial that you understand and truly believe in the power of volume because it rarely lies! With very rare exception, significant changes in volume nearly always lead to signficant changes in price, depending on the trend of the market. While volume spikes in individual stocks can sometimes be misleading and based on factors that are not known to us, volume spikes in ETFs such as SPY, DIA, or QQQ do not lie. If volume significantly picks up in one of the broad-based ETFs, it clearly indicates an increased interest, either buying or selling, in the broad market. Volume is the most reliable leading indicator we have at our disposal and you are missing the big picture if you fail to make volume one of the first aspects of your daily technical analysis of the market.

Total market volume in the Nasdaq yesterday set a new high of the year again by surpassing last Thursday’s volume. In fact, volume in QQQ yesterday was over 141 million shares, the highest volume day since July 24, 2002, which saw a QQQ rally of nearly 10% that day! Total volume in the NYSE yesterday was also quite healthy, although it did not surpass Thursday’s. The daily chart of the Total Nasdaq Market Volume below clearly indicates how volume has increased over the past week, which has fueled the recent rally. Notice also how volume has been coming in above both the 5 and 50-day moving averages, two key levels to watch with total market volume:

Going into today, there is a large opening gap-up in the pre-market futures. If this holds into the open, we will see each of the major indices open well above yesterday’s closing prices. At that point, it becomes important to take a “wait and see” attitude before getting too aggressive on the long side of the market. The key will be whether or not the market is able to hold the opening gap going into the first reversal period. If we do not fill the gap by selling off down to yesterday’s close within the first 30 minutes of trading, odds are pretty good that the market will either consolidate (correct by time) by trading sideways at the high of the day OR we could even have another uptrending day. On the other hand, if the market is not able to hold onto the gains from the opening gap by 10 am, we could enter into a downtrending day based simply on a normal price correction. Advanced traders ONLY may consider fading the opening gap by selling short after the first five minutes of trading and keeping a tight stop just over the high. Based on relative weakness in the Nasdaq yesterday afternoon, QQQ is a potential fade candidate. Overall, the direction of the market today will likely be determined based on how it acts within the first 30 minutes of trading. As always, look to volume for clues.

As a final note, remember there is a lot happening today both on the economic and geopolitical front. As you are probably aware, Hussein has been given a final ultimatum to leave Iraq within 48 hours or war will begin “at a time of our choosing.” The 48-hour deadline will come at 8:00 pm EST Wednesday. There is no prior precedence for how the market will act as we approach the deadline, although it has obviously reacted bullishly thus far. I personally think the market will sell off as we approach the deadline and people begin to realize the potential biochemical dangers and terrorist threats the U.S. may face if the war starts. Furthermore, it will likely be a case of the old axiom “buy the rumor, sell the news,” which means that people buy the market in anticipation of the war starting but are likely to sell once news of the war actually begins. In addition, there is an FOMC meeting today with a decision on interest rates, which are likely to remain unchanged.

Today’s watch list:

QQQ – Nasdaq-100 Index Tracking Stock

Short

Trigger = any price ABOVE 26.70 (above yesterday’s close)
Target = 26.05 (support of March 14 high)
Stop = 20 cents ABOVE the high of first 5 minutes

Notes = This is a fade setup to short QQQ into the opening gap. Assuming the gap holds, we want to short QQQ and put the stop just above the 5-minute high, whatever that ends up being. This is an advanced trade that new trader may want to pass by. Keep share size small in this one too because we are fading the trend. QQQ due for a correction and was showing relative weakness into the close yesterday. This will probably be a DAY TRADE not a swing trade.

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 = + $162

SPY long (HALF position from March 14) –
bought 83.71, sold 85.55 (avg.),
points = + 1.84, net P/L = + $181

DIA long (HALF position from March 14) –
bought 78.63, sold 80.30 (avg.),
points = + 1.67, net P/L = + $164

RTH long (from March 14) –
bought 67.20, sold 68.74 (avg.),
points = + 1.54, net P/L = + $151

Open Positions:

(none)

Notes: We legged out of each of our overnight positions yesterday in one-third increments, as alerted via e-mail.

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