The Wagner Daily | March 19, 2003

Commentary:

There’s not a whole lot to say about yesterday’s uneventful and range-bound trading. After a small opening gap up, minor selling pressure filled the gap, but the major indices quickly found support near the highs of the previous day. This caused the market to enter into a choppy and sideways trading range that lasted until the final thirty minutes, which saw slight buying pressure. The Feds’ decision to keep interest rates the same, along with their “no comment” on the general state of the economy, was largely a non-event that the market barely reacted to. Overall, the market acted much as you might expect by correcting by time after making such a large move over the past week. There were very few intraday trade setups, so we spent most of the day in cash and kept share size small on the few trades we tested the waters with.

Going into today, the big question on traders’ minds is whether or not we will see any selling pressure as we approach the 8:00 pm EST deadline for Hussein to leave Iraq. While most people are expecting a war to be short-lived, a few unknowns still exist, such as whether or not Iraq may use biological or chemical weapons on U.S. troops. Based on this reasoning, it seems logical that we could see selling pressure today as many traders will want to lock in gains before the deadline is reached after the close today. But, then again, nobody ever said the market was logical! From a purely technical basis, the market is looking quite bullish based on chart formations, breaks of significant resistance levels, and a sharp increase in volume. However, as you know, any negative news about the impending war with Iraq could throw the technicals for a sudden loop.

Let’s take a look at some key technical levels to keep an eye on over the next several days. We’ll begin by looking at an hourly chart of QQQ (Nasdaq 100 Index):

As you can see from the chart of QQQ above, the Nasdaq has formed a clear uptrend line that began with the first anchor point on the low of March 12. Notice how QQQ traded sideways yesterday and ran into the trendline in the afternoon. This gave QQQ a little boost into the close. This trendline is the primary support level you want to watch going into today. As long as the trendline stays intact, it will support a continuation of the rally. However, it is rare that trendlines stay at that steep of an angle for many days without a correction to form a more gradual uptrend. While any break of the trendline is shortable, consider keeping your share size minimal on the short side because there is a decent base of support that has been building over the past two days. If you look at hourly charts of SPY (S&P 500 Index) and DIA (Dow Jones Indu. Index), you will see a similar trendline that has formed off the lows of March 12. But unlike QQQ, neither SPY nor DIA came into contact with their hourly trendlines yesterday because they were showing slightly more relative strength than QQQ. Another interesting thing you will notice on the hourly charts of SPY and DIA is that the 20-MA correlates exactly to the trendline support. Therefore, just keep an eye on the 20-MA of the hourly charts going into today. Now let’s take a look at the daily chart of DIA:

Notice on the DIA chart above how yesterday’s high in the Dow was equal to the low of December. This is a clear example of how a prior support level (low of December) becomes the new resistance level (yesterday’s high) once the support level has been broken. Another clear example of that is the 20-day moving average. Notice how DIA found support of the 20-day moving average yesterday, which marked the low of the day. Although not illustrated for you, the daily chart of SPY looks very similar to DIA and also ran into resistance of the December low yesterday after bouncing off support of its 20-day moving average. The daily chart of QQQ looks a little different because it has been showing relative strength to SPY and DIA ever since it broke the key weekly downtrend line we have been discussing over the past week.

Based on the hourly and daily charts, the market looks poised to go higher in the intermediate term, assuming it can build a base of support at the current prices. However, the big unknown is whether the market will be able to hold onto its gains in the short term, over the next several days. If it does, that is quite a bullish sign and indicates that SPY and DIA will probably make another leg higher and test their 200-day moving averages (the purple line on the DIA chart above).

We will go into the day with an open mind, ready for anything the market throws at us, but be prepared for volatility in the afternoon because many traders will want to adjust their positions going into the 8:00 pm Hussein deadline this evening. As such, it is probably a good idea to keep share size small on both sides of the market, at least until the war gets under way (assuming that is what happens). Remember to trade what you see, not what you think!

Today’s watch list:

BBH – Biotechnology HOLDR

Long

Trigger = (see notes below)
Target = $102 (high of May, 2002)
Stop = (see notes below)

Notes = We brought BBH to your attention a few days ago by mentioning that it was approaching a big breakout point at the $93 area. It has broken out since then and closed at $95.46 yesterday. Now that BBH has confirmed the breakout, we want to wait for a retracement to the $93 area, which should act as its new support, and look to take a long position for a swing trade. The target will be the $102 area once we enter. You will notice that there is no trigger price listed because we want to see how BBH acts once it retraces, which may not happen today. We will, however, send an e-mail when/if we enter the position. Just wanted to give you a heads-up to make sure you keep an eye on it.

QQQ – Nasdaq-100 Index Tracking Stock

Short

Trigger = below 26.80 (below trendline support and yesterday’s close)
Target = 26.05 (support of March 14 high)
Stop = 27.10 (above yesterday’s high)

Notes = We may have been a day early to the party yesterday, but QQQ is now even closer to breaking its support of the hourly uptrend, as discussed in the commentary above. We are simply looking to catch a small selloff on the break of support. Advanced traders could also consider fading today’s opening gap by shorting QQQ on the open and keeping a tight stop just over the highs.

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 = ($56)

Open Positions:

(none)

Notes: We also took very small share size of a few trades overnight per a call made in the ETF Real-Time Room, but all results from the Real-Time Room trades are reported weekly. Only trade setups listed in The Wagner Daily are reported above.

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