The Wagner Daily | April 16, 2003

Commentary:

The strong pre-market gap that existed early yesterday morning faded by the time the market opened. This set a negative tone for the market right out of the gates. Though we made a small profit on our overnight positions of SPY and QQQ going into yesterday morning, most of the unrealized profits evaporated when the futures lost their pre-market gap. After some initial selling into the 10:00 am reversal period, the major indices found support and rallied to set a new high on continuation of Monday’s rally. However, traders became nervous about Intel and Microsoft earnings, both of which were due after the close, and the afternoon session saw a strong selloff that caused the broad market to retrace more than 61.8% (Fibo number) of its intraday gains. Then, as the final hour of trading rolled around, traders again speculated on positive earnings reports from “Wintel” and rallied the market to close at the highs of the day. Overall, yesterday’s intraday trading was quite a roller coaster ride!

Although trading was quite volatile during yesterday’s intraday session, we eventually received the extremely important confirmation signals we were looking for yesterday when both SPY (S&P 500) and DIA (Dow Jones) closed above their 200-day moving averages for the second consecutive day. Further, we saw the necessary accompaniment of a significant increase in total market volume, which was the highest we have seen in a week. QQQ (Nasdaq 100) also showed strength yesterday and closed above resistance of its 20-day moving average. The intraday charts depict yesterday’s action as indecisive, but the daily charts of the major indices are each beginning to look quite bullish! More importantly, the weekly charts are showing a potential breakout above resistance of a multi-year downtrend line.

One thing we have learned over the years is the power of using weekly charts to study the intermediate-term direction of various indexes and stocks. Despite the fact that daily charts are the most popular time frame that traders use for analysis, we have found that weekly charts provide a much more reliable picture of the true trend of an index. While daily charts are ideal for confirming what you see on a weekly chart, the problem with daily charts is that there is usually too much “noise” from the day to day opening gaps that prevents you from getting a clear picture of what is really happening out there. However, the weekly charts remove all that noise because each candlestick or bar of a weekly chart represents an entire week’s worth of data, thereby removing the day to day gaps that daily charts depict.

In addition to removing the noise, trendlines and support/resistance levels on a weekly chart will always hold more weight than the trendlines and support/resistance levels on a daily chart because the longer the time frame, the more solid those levels become. Did you ever enter a trade that looked great on a daily chart but, for some reason, the trade kept running into rock solid support or resistance, seemingly out of nowhere? If so, chances are good that you missed a key support or resistance level that you would have seen on a weekly chart.

Of course, you cannot use a weekly chart to find precision entry and exit points for trades on an intraday basis, but we have found weekly charts to be excellent tools for determining which ETFs make the best multi-week “swing” trades. In fact, both the EWZ and BBH trades we bought last Friday in the ETF Real-Time Room were the result of careful technical analysis of weekly charts. So far, both of these trades are showing strong unrealized gains for MTG and we will continue using weekly charts as a basis for selecting “longer-term” trades. So, now that you understand the importance of weekly charts, let’s take a look at weekly charts of the major indices to see what the “big picture” is telling us:

The weekly chart of DIA above is showing a potential breakout of a downtrend line that has been in place since March of 2002. The trendline correlates with the recent highs of the 85.40 area that were set on March 21 and again on April 9. Notice how the 50-week moving average is also showing convergence with the primary downtrend line. Also notice the double bottom that has formed, which is bullish. If DIA can break that major area of resistance of the double top AND the weekly downtrend line, we will probably see it trade up to its previous “swing high” around 90.

The SPY chart above looks very similar to DIA. Like DIA, it also is showing a potential breakout of a downtrend line that has been in place since March of 2002. The trendline correlates with the recent highs of the 90.85 area that was set last week. Notice how the 50-week moving average is also showing convergence with the primary downtrend line. Also notice the double bottom that has formed, which is bullish. If SPY can break that major area of resistance of last week’s high of 90.85, we will probably see it trade up to its previous “swing high” around 94 – 95.

Although it is difficult to see because of the scale of the chart, QQQ has already broken its prior weekly downtrend line that began in May of 2001 and has been in place for nearly two years! We’ve been discussing the importance of this ever since QQQ broke its weekly trendline resistance a month ago. In addition, QQQ is the only one of the three major indices that is ABOVE both its 20 AND 50-week moving averages. Most importantly, the 20-week MA has crossed over the 50-week MA, technically indicating a change in the weekly trend. It sure looks to me like the Nasdaq is likely to pull the broad market higher based on its weekly chart! QQQ is also looking like a tasty long term trade for my IRA, with a stop just below the 20 and 50-week MAs, which are around 25.40, about a point below yesterday’s close. Good risk/reward for long term!

In case you did not have a chance to watch after-hours trading yesterday, things really heated up after the close! I won’t bore you with details, but Intel and Microsoft, two of the biggest bellwethers in the Nasdaq, both turned in better than expected earnings results that pleased Wall Street. Volume immediately surged in the after-hours market and both the S&P and Nasdaq futures went through the roof. This confirms the reason that volume has been so light over the past week — the “smart money” was waiting on the sidelines until some of the big boys reported earnings. From the looks of the high volume and strong movement in yesterday’s after-hours session, odds are good that today’s pre-market opening gap holds throughout the day. In fact, if volume is strong enough, we could easily see a large percentage opening gap and then an intraday uptrend on top of that. The key, of course, is to wait until we enter the 9:50 to 10:00 am reversal period. If the broad market sets a new intraday high during that time period, odds are good that we enter into an intraday uptrend. If, however, the market has not set a new high of the day by 10:00 am, be careful with entering new long positions UNLESS we see a break to new highs first. For more details on how Morpheus Trading Group manages pre-market gaps, please consult the MTG Opening Gap Rules.

On a side note, remember that the U.S. equities markets are closed this coming Friday for Good Friday holiday. Also, for those of you who have never traded in the after-hours markets and would like to learn more about it, consider checking out my second book, The After-Hours Trader (McGraw-Hill, September 2000). Although much of the material is dated to the previous bull market, there is a plethora of information on the various ECN options available to you for placing trades after the close of the regular trading session. Maybe you can find it in a library or you can buy a used copy on Amazon for $2.66. 🙂

Today’s watch list:

Since we are already in three positions going into today, we will focus on managing and possibly adding to our open positions in SPY and QQQ today rather than looking for new plays. We’ll keep you posted via e-mail alerts if we add to the positions or take profits.

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). Net P/L figures are based on the quantity of shares represented in the MTG Position Sizing Model.

Closed
Positions:

(see “notes” below)

Open Positions:

unrealized P/L = + $58

QQQ long (1/2 position from April 15) –
bought 26.18, will e-mail updated stop and target prices after market opens, unrealized points = + 0.10, unrealized P/L = + $18

IEF short (1/2 position from April 9) –
shorted 85.87, new stop at 86.25, target of 84.00, unrealized points = + 0.30, unrealized P/L = + $528

Notes:

We closed both the SPY and QQQ trades that we took overnight on Monday, April 14 and netted a small profit on each one. However, we re-entered 1/2 positions of SPY and QQQ before the close yesterday and took them overnight again. Because yesterday involved numerous exits and re-entries in SPY and QQQ, we will report trade results in the next weekly newsletter rather than confuse you here with the multiple entry and exit prices from yesterday. Details on yesterday’s SPY and QQQ re-entries are listed above under “open positions.” We will e-mail you an update after we see how today’s opening gap holds up.

In addition to the trades above, we are still long BBH and EWZ from the ETF Real-Time Room call last Friday.

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