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The Wagner Daily


Commentary:

Just like April 21, yesterday was basically a consolidation day that enabled the markets to digest the gains of the previous day. Markets never go straight down nor do they go straight up and yesterday’s sideways trading action was known as a “correction by time.” Rather than retracing down to a certain price, markets often will trade sideways in a consolidation pattern that allows the intraday moving averages to rise up and provide price support to the rally. Generally speaking, the larger the rally was, the longer the period of consolidation that occurs. Once again, intraday price action on a 5 or 15 minute chart may have appeared volatile, but a longer time frame such as an hourly or daily chart shows a sideways consolidation at the previous day’s highs.

TTH (Telecom HOLDR) was very strong yesterday and gained more than 7% on the day. It may see a sustained rally, making a potential swing trade. WMH (Wireless HOLDR) also broke a key weekly trendline and horizontal price resistance yesterday, prompting us to enter a long position for a swing trade. Positive report from Qualcomm after the bell yesterday should aid that play as well. BBH (Biotech HOLDR) was also quite strong and we sold the BBH swing trade from our April 11 entry, netting a 7-point gain. International ETFs continued their gains yesterday as well. Semiconductors (SMH) and Software (SWH) were two of the weakest sectors yesterday, which is not surprising given the recent gains in the semis. Total market volume remained strong yesterday and the Nasdaq had its highest volume day since March 21 (over 1.81 billion shares). Advancing volume outpaced declining volume by 2:1, which was also positive. However, bonds were not very weak yesterday, which I thought was an interesting divergence. Keep your eyes on the bond market for clues about the direction of the equities markets.

One thing that I found fascinating yesterday was how the rally in the Nasdaq Composite (COMPX) stopped dead in its tracks when it reached its prior high of 1467, which was set on January 13, 2003. The daily chart below clearly illustrates this:

No matter how many years I have been studying technical analysis, I am still amazed at how a previous support or resistance level can cause an entire market to reverse on the dime. Even though QQQ, the Nasdaq 100 Index, actually set a new year-to-date high yesterday, the Nasdaq Composite (which is composed of more stocks) did not follow suit. Instead, it formed a perfect double top within 1 point of the previous high of January 13. Needless to say, 1467 is a VERY important level to watch on the Nasdaq Composite over the next several days. Therefore, two possible scenarios seem pretty clear to me: 1.) The Nasdaq breaks that resistance level during the next few days and takes off like a rocket up to the high of 1521 (from December 2, 2002) OR 2.) Bears show up in mass quantities and spark a strong wave of selling, leaving a perfect double top for the year. There are several mixed technical signals that make it difficult to predict which scenario will occur, but I feel there are more bullish signals right now than bearish. Either way doesn’t matter to me because I am a short-term trader and profit from both sides of the market, but it makes the general public happy when markets go higher.

As if there is not enough resistance of the Nasdaq Composite, the Dow Jones Industrial Average also stopped dead in its tracks at its prior highs on the daily chart. If the Dow is unable to break yesterday’s highs, it will have formed a perfect TRIPLE top. Take a look:

As you can see the rally in the Dow stopped immediately upon running into its previous high of March 21. In addition, if you look at a weekly chart of the Dow, you will notice that yesterday’s high stopped just shy of the 50-week moving average, which was also the weekly downtrend resistance line (see yesterday’s newsletter). However, despite these bearish signals, it’s interesting to note that the Dow has been setting a series of higher lows since the March 21 high. This forms what is known as an “ascending triangle” chart formation, which is typically a bullish pattern IF it follows through. It goes without saying that yesterday’s high in the Dow is a key level to watch over the next few days, just like the 1467 level in the Nasdaq Composite. If the Dow breaks yesterday’s highs, it is a no-brainer to buy DIA, the Dow Jones Industrials ETF. However, a failure to break that level could draw in the bears. Perhaps you are beginning to see why I have been saying that the performance of the market over the next several days/weeks is crucial to determining the intermediate-term direction.

If you review the weekly chart of SPY from yesterday’s newsletter, you will notice that SPY is approaching the upper channel of its weekly downtrend line from the high of September 2000. As you know, this is a very strong resistance level that the market will undoubtedly have a little trouble with. While the daily chart of SPY shows smooth sailing all the way up to the January high of $94, the weekly chart shows that downtrend line pressing down just above yesterday’s high. This is why it is important to always study not only the daily charts, but also the weekly charts in your nightly research. If you don’t, you will overlook important support and resistance levels that often cannot be seen on a daily chart. In addition, support and resistance levels on a weekly chart always hold more weight than support and resistance on a daily chart.

Going into this morning, it could become a bit tricky. The major indices closed near their highs yesterday, which typically aids in providing follow-through in the direction of the trend the next morning. However, the market was unable to break its prior intraday high going into the close and formed a double top off the high that was set around 1 pm EST. Odds of an upside opening gap would have been increased if the market would have set a new high into the close, but the consolidation was bullish nevertheless. We only took 1/4 position sizes in SPY and QQQ overnight because we are still in an uptrend, but wanted to reduce our overall risk exposure due to the intraday double top. By micromanaging your share size as we do, you can still participate in potential follow-through moves, but decrease your overall risk. Even if the market opens with a large gap down, our actual capital loss is small because we only had 1/4 our normal share size.


Today’s watch list:


IYR – iShares Dow Jones US Real Estate Index

Short

Trigger = below $81.15 (below yesterday’s low)
Target = $79.80 (50% Fibo retracement)
Stop = $81.90 (over yesterday’s high)

Notes = This sector has gotten a bit ahead of itself and showed signs of weakness yesterday. We expect it to follow through to the downside for a correction over the next few days. This ETF can have a wide spread, so make sure you use limit orders and keep your position size accordingly small. This ETF is not yet on the MTG Position Sizing Model, but it will most likely be assigned a multipleer ratio of 0.5 (50% of SPY share size). In the event of a large opening gap down, remember the MTG Opening Gap Rules.


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:

    (Although not an “official” call from yesterday’s newsletter, we took just 1/4 position of both SPY and QQQ overnight, as called in the ETF Real-Time Room. We will send an e-mail alert to let you know when we close these positions, just in case any Wagner Daily subscribers are also long overnight.)

    WMH long (from April 23) –
    bought 34.85 (avg.), stop at 32.50, target at 39.25, unrealized points = + 0.15, unrealized P/L = + $14

    IEF short (1/2 position from April 9) –
    shorted 85.87, new stop at 86.25, target of 84.00, unrealized points = + 0.40, unrealized P/L = + $37

Notes:

Will update you on yesterday’s exit prices of SPY and QQQ in a separate e-mail later today. It’s been a bit confusing with entry and exit prices due to the quantity of entries and exits we have had to make lately in order to minimize risk, but profit on entries.

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

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