Commentary:

Friday began the day with a small opening gap down that triggered selling immediately after the open. The selloff lasted only the first 90 minutes of trading, after which the major indices traded sideways for the remainder of the day in a very narrow range. In a pattern that has been occurring with increasing frequency, the first hour of the trading day was the only time period during the day that offered decent intraday trading opportunities. One of the reasons the market failed to trade any lower after the initial morning selloff was due to the major indices coming into support of their daily trendlines. In particular, SPY (S&P 500) found support at the $90 area, which correlates to the lower channel support of the daily uptrend. The daily chart of SPY below illustrates this:

In addition to support of the uptrend line, notice also how SPY has horizontal price support around $90.15, which loosely correlates to 900 on the S&P futures, a big psychological support support level. Psychological support and resistance levels occur when indices are trading at or near large round numbers such as 1000 on the Nasdaq futures, 10,000 on the Dow, 900 on the S&P futures, etc. There is no technical reason why an index should find support or resistance at any one of those levels, but the large round numbers often act as support or resistance because people treat them psychologically as if they are. Therefore, it becomes a self-fulfilling prophecy. The combination of trendline support and horizontal price support provided us with a low-risk entry point for swing trades on the long side because the lowest-risk strategy in an uptrend is to buy each pullback to trendline support, set a stop below the trendline support, and sell into the next rally into trendline resistance.

If you make the mistake of only looking at intraday time frames on your charts, you will miss key support and resistance levels that are only apparent on daily and weekly charts. That is why we utilize a top-down approach, studying weekly charts first, then the daily charts, hourly, then 15-minute. Remember that the longer the time interval of the chart, the stronger the support/resistance level will be. Therefore, if an ETF has resistance at $25 on an hourly chart, but big support on the daily chart at $25, the support level is more likely to win over the resistance level on the hourly chart. So, since we already looked at the support levels for SPY on a daily chart, let’s take a look at the more significant weekly chart:

As you will quickly see, the upper channel resistance of the weekly downtrend line marked the high of the SPY rally this week. Because this downtrend line has been intact for nearly three years, it is obviously a very strong resistance level that SPY is going to have trouble getting through. However, based on the double bottom and subsequent higher low that has been forming since last July, it appears likely that SPY is going to break through its three-year downtrend line, probably within the next week or two. While this could spark a mini bull-market rally that lasts a few months, perhaps even through the rest of 2003, it is likely that the stock market will trade in a choppy sideways pattern beyond that, allowing the major indices to further correct by time. IWM (Small Caps) and MDY (Mid-Caps) are have both been showing relative strength to the S&P 500, which should also help lead the way for SPY. Though we feel the odds are good that SPY breaks its three-year downtrend line soon, let’s wait for the confirmation before getting aggressive on the long side.

QQQ (Nasdaq 100) continues to act well, buoyed by strength in the Biotechs (BBH) and Internets (HHH), both of which have been on fire during the past week. The weekly chart continues to look excellent because QQQ has remained above both its 20 and 50-week moving average for six consecutive weeks. In fact, the 20-week moving average has crossed over the 50-week moving average, indicating a change in the intermediate term trend of the Nasdaq 100. The last time the 20-week MA was above the 50-week MA was in October of 2000, nearly three years ago. Last week’s high of 27.75 is the key resistance level to watch in the coming week. Also remember that the COMPX (Nasdaq Composite) needs to get past the 1467 area, which is where it formed a double top off the January highs last week.

As you know, DIA (Dow Jones Industrials) continues to lag both SPY (S&P 500) and QQQ (Nasdaq 100). DIA actually closed just BELOW its 200-day moving average on Friday, even though both SPY and QQQ are still well above their 200-day MAs. If the S&P fails to break its weekly downtrend resistance line in the coming weeks, the Dow is likely to be the index that leads the broad market lower, thereby creating shorting opportunities in DIA. But, as long as the uptrend remains intact on the daily charts, it’s lower-risk and more profitable to be on the long side of the market, although you need to be nimble and ready to switch at a moment’s notice.

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Today’s watch list:

DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)

Short

Trigger = below $82.70 (below low of last week and 20-day MA)
Target = $81.00 (support of 50-day MA)
Stop = $83.55 (above resistance of 200-day MA)

Notes = Although we are biased to the long side right now, the Dow continues to be the laggard of the major indices. If there is further weakness in the broad market today, the Dow could lose support and see a big selloff below the low of last week. We want to be prepared for that in case it occurs.

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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:

IYR short (from April 24) –
shorted 81.15, covered 80.02, points = + 1.13, net P/L = + $110

Open Positions:

WMH long (from April 23) –
bought 34.85 (avg.), stop at 32.50, target at 39.25, unrealized points = (0.80), unrealized P/L = ($82)

IEF short (1/2 position from April 9) –
shorted 85.87, new stop at 86.25, target of 84.00, unrealized points = (0.24), unrealized P/L = ($49)

Notes:

We covered the IYR short on Friday because it came close to our price target within one day, so we just took the profit. IEF came within a few pennies of our stop on Friday, but we are still short with stop at 86.25.

Remember that only trades that were initially called on each day’s Wagner Daily are reported above. All trades that are called each day in the ETF Real-Time Room are reported separately, on each weekly newsletter. Therefore, our open positions in TTH, SPY, and QQQ are not reported above and are updated with commentary in the room.

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)

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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.

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Yours in success,

Deron M. Wagner