The Wagner Daily | March 20, 2003

Commentary:

Despite weakness in the morning session that had the potential to trigger significant selling in the broad market, the market once again demonstrated its resiliency yesterday and closed at its intraday highs. The most notable thing about yesterday was the clear divergence between the major indices. QQQ (Nasdaq 100 Index) showed relative weakness, and closed net lower on the day, but SPY (S&P 500 Index) and DIA (Dow Jones Indu. Avg.) both closed slightly higher. The relative weakness in the Nasdaq was evident within minutes of the market opening because the Nasdaq quickly dropped below its intraday moving averages and went negative on the day while SPY and DIA both held up above the previous day’s highs for quite a while before weakness in the Semiconductor (SOX) Index finally caused SPY and DIA to lose support as well. When the SOX Index rolled over, QQQ broke BELOW the lows of the previous day (March 18), but SPY and DIA continued to show relative strength and never broke their previous day’s lows. On days when the Nasdaq and S&P are not in sync with each other, the market tends to be very choppy because one index wants to go in a particular direction while the other is attempting to go in the opposite direction. In the case of yesterday, the S&P was holding up well and acted like it was attempting to break out during the entire morning. However, the Nasdaq kept trying to roll over once it broke its hourly trendline support from the March 12 lows. This lack of synchronization made for a very sloppy and choppy downtrend in the morning session that reversed later in the afternoon. Notice how quickly QQQ dropped once it broke the trendline support from the March 12 low:

One thing I want to remind you of is the importance of mentally splitting each trading day into two separate sessions. Many new traders make the mistake of looking at each day as only one trading session, but the reality is that the market action in the morning and late afternoon are often two very different animals. In the case of yesterday, QQQ was in a downtrend, setting lower highs and lower lows, throughout the morning session, but reversed course going into the afternoon session and actually entered into an uptrend (albeit not a very strong one). When dividing the day, we generally think of the morning session as ending around 11:30 am EST each day, at which point the market typically enters the “mid-day doldrums,” a two-hour period where volume usually dries up and volatility tends to flatten out. We typically use the period from 1:00 to 1:30 pm to re-assess the market and look for new setups as if the day was starting over. In doing so, you will notice that quite often the market looks technically very different than it did coming into that day. Although the market occasionally continues its steady morning trend into the afternoon session, that only occurs about once per week (on average). Therefore, we recommend you always mentally treat the morning and afternoon trading sessions as two separate days because it will keep you mentally prepared for afternoon reversals in the afternoon and prevent you from assuming that any morning trend is going to continue into the close.

The biggest focus of our attention during the rally of the past week has been the increase we have seen in total market volume (click here to read the March 17 weekly newsletter, which analyzed recent market volume). In order for the rally to continue, we need to keep seeing high volume on the uptrending days and a slight decline in volume on the retracement or consolidation days. This pattern of changes in volume is typically bullish because it basically indicates that selling volume is lighter than buying volume. In other words, the people who bought during the rally are not turning around and dumping their shares on the first retracement or consolidation day. Therefore, it is important to keep a daily focus on total market volume in order to look for any potential clues that might indicate when/if the recent rally is nearing a top. Although we do not have much confirmation yet, yesterday’s relative volume gives us a reason to be cautious entering today on the long side.

The NYSE total market volume yesterday was the lightest we have seen since March 11, one day BEFORE the rally began. While this light volume would be good to see on a retracement or consolidation day, the problem is that the S&P and Dow both closed higher yesterday. This indicates that the market went higher not because of a huge abundance of buyers, but rather from a lack of sellers. We therefore want to be careful on the long side because it COULD indicate that buyers are drying up, at least in the very short term. In addition, the Nasdaq total market volume was actually pretty heavy yesterday, which is not bearish because the weakness in the Nasdaq yesterday indicates that most of the volume was on the sell side. But, here’s the kicker — we don’t have enough confirmation to draw any solid conclusions yet because we probably did not get an accurate picture due to yesterday’s 8:00 pm Iraqi ultimatum. In other words, many traders simply stayed out of the markets and took a “wait and see” approach to trading. Nevertheless, let’s keep a close eye on volume in the coming days because it is the most reliable leading indicator we have.

Although we could fill a whole page discussing the technical state of the market going into today, the MOST IMPORTANT thing I can tell you is that the market is likely to be primarily news-driven over the next few days. This means that technical analysis, while effective for determining entry and exit points, will probably be taking a back seat to any news over the war. When trading in the beginning stages of a major event such as a war, any little rumor or news blip that comes across the wires typically has the effect of causing erratic, knee-jerk reactions in the market, which can easily cause you to get stopped out right before the trade comes back in your direction. As proof of this, just take a look at how the Globex futures, which trade overnight, immediately dropped 5 points from the 875 level at the same moment Bush said live on TV last evening that the war in Iraq “may take longer than some people realize.” The easiest way to avoid this problem is to be patient and simply don’t trade for a few days while the war gets started. Chances are that any continuation of the recent rally probably would not occur without the market correcting first, even if just through sideways consolidation. Therefore, you are not likely to miss much by being in cash and will probably save yourself a bunch of small losses. If you do trade, you can compensate by using slightly LOOSER stops, but reducing your share size to compensate. In doing so, you are risking the same amount of capital as if you used tighter stops and bigger share size, but are less likely to get chopped up.

With the warning above being said, the key technical level to watch in the market today (in addition to volume) continues to be the hourly trendline support from the low of March 12 (as discussed extensively in yesterday’s Wagner Daily). While SPY and DIA briefly tested their trendline support, which also correlates to the 20-MA, both indices recovered and closed above that trendline. QQQ, as shown above, already broke that trendline. As long as SPY and DIA stay above this trendline, you should stay on the long side. However, with each passing day that the steep trendline is maintained, odds are increased that it will be broken. In addition, SPY and DIA are now approaching resistance of their 20-WEEK moving averages, which will take a lot of volume to get through. We have had six consecutive days of higher closing prices in the broad market, so we would not be surprised to see a correction over the next one to two days. Although the picture technically looks bullish in the intermediate term, it seems more likely the market will take a rest in the very near term. Also be aware that the U.S. Department of Defense will be making a statement today at 11:30 am EST. Above all, remember that NEWS AND RUMORS will probably dominate intraday market direction.

Today’s watch list:

DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)

Short

Trigger = below 82.40 (below hourly trendline support and 20-MA)
Target = 81.10 (low of March 18, just above 20-day MA)
Stop = 83.10 (above yesterday’s high)

Notes = Just looking to short if DIA corrects by price. Unlike picking a top, we will ONLY short if it confirms its weakness by breaking the hourly trendline support. Remember the MTG Opening Gap Rules if it gaps down and opens significantly below its trigger price.

SPY – SPYDERS (S&P 500 Index Tracking Stock)

Short

Trigger = below 87.45 (below hourly trendline support and 20-MA)
Target = 86.20 (low of March 18, just above 20-day MA)
Stop = 88.15 (above yesterday’s high)

Notes = Same setup as DIA above. Remember the MTG Opening Gap Rules if it gaps down and opens significantly below its trigger price.

BBH – Biotechnology HOLDR

Long

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

Notes = BBH finally saw a mild retracment yesterday and is approaching our entry point at the $93 area, but I would like to see more of a correction before taking a position. Again, we will send an e-mail alert when/if we buy it. Here is our original comments on BBH from yesterday, when we first added BBH to our watchlist:

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.

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 = + $88

Open Positions:

(none)

Notes:

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