As anticipated, the major indices held support of their daily uptrend lines yesterday and bounced sharply off those key support levels we discussed in yesterday’s Wagner Daily. Despite modest volume, each of the major indices participated in an uptrend yesterday and closed just below their respective highs of last week. The strength of the uptrend, even with a lack of volume, could be attributed to the sharply positive advancing volume to declining volume ratios. In the NYSE, advancing volume outpaced declining volume by over 6 to 1, while the ratio was more than 4 to 1 in the Nasdaq. The combination of light volume and positive ratios indicated that although buyers were not in abundance, sellers were very scarce yesterday.
The most bullish thing about yesterday’s broad market rally is that DIA (Dow Jones Industrials) actually kept pace with both SPY (S&P 500) and QQQ (Nasdaq 100). SPY closed up 1.73% yesterday, but DIA closed up 1.96% (the same as QQQ). While this may not seem like a big deal on the surface, it is very important because it was the first day in quite a while where the gains in the Dow kept pace with the gains in the S&P and Nasdaq. If the Dow did not start to move soon, the rally in the S&P and Nasdaq was bound to be short-lived. We will continue to keep a close eye on the Dow for an indication of the breadth of any subsequent rallies.
We’re still long the quarter positions of SPY and QQQ we bought during Friday’s selloff down to daily price support. Based on yesterday’s closing prices, we currently have an unrealized gain of 1.5 points in SPY and 0.40 points in QQQ. Even though it may be a bit scary to buy positions on a day when the market is weak, you can really profit from a lot of low-risk setups IF you’re paying attention to daily and weekly support levels of the major indices. Based on SPY’s trendline support just over $90, we knew that Friday’s entry offered a good risk/reward ratio because we were risking only 1/2 point to potentially profit with multiple points, which is what is occurring so far. If the trendline support failed yesterday, we would have quickly sold our QQQ and SPY positions with small losses, but we knew that if the trendline support continued to hold (which it did), we would be long at a great price. Anyway, our plan is to continue trailing stops higher rather over the next several days and stay in these positions until they hit their trailing stops. While intraday trading can provide income during choppy or sideways markets, the real money is made by taking mutli-day positions in a trending market and letting the profits ride when you’re right and getting out quickly when you’re not. That’s why we simply sat on our long positions yesterday rather than calling a bunch of intraday trades in the ETF Real-Time Room yesterday.
Out of all the sector ETFs we follow each day, the Telecom HOLDR (TTH) was up the highest percentage yesterday at 3.50 percent. Wireless, the other sector we have a long position in, was also strong. This confirms that we have correctly predicted the sector rotation back into the sectors that Wall Street has forgotten about during the rally of the past six weeks. The charts of the leaders in these sectors are looking great. For example, VOD and NXTL both broke out to new 52-week highs yesterday.
We also took a long position in EWJ (Japan ETF) yesterday, as called in the ETF Real-Time Room. Although the daily and weekly charts of EWJ are very bearish, there are a few things we like about this play. First, the World Health Organization has begun announcing that SARS is now contained in all countries except China. We feel this will cause a bit of a relief rally in Asian shares. EWJ also formed a triple bottom yesterday off its lows of April 14 and 25. It then formed a bullish engulfing candlestick into the close. Since our stop is at 6.15, only 8 cents below our entry, we feel that EWJ offers a positive risk/reward ratio at its current price. Overnight, Hitachi and Mitsubishi both turned in positive earnings reports that beat expectations, which is likely to fuel the Nikkei. Although Japan’s markets are closed today for Green Day Holiday, shares in the rest of Asia are all solidly up by several percent. This should bode well for EWJ when the Nikkei resumes business tomorrow.
Going into today, we want to keep a very close eye on SPY and DIA. Yesterday’s high in SPY was equal to the upper channel resistance of its weekly downtrend line. This very important level, which we have been discussing for the past several weeks, is likely to be tested today. If (and that’s a big IF) SPY closes above this trendline and holds for several days, it will confirm the technical break of a downtrend line that has been in place since August 2000 (nearly three years). That magic number to watch is the high of last week, which is 92.35. Here is an updated look at the weekly SPY chart:
The weekly chart of DIA looks just as interesting because the Dow, just like the S&P, closed right at resistance of its weekly downtrend line, which also convergences with the 50-week moving average. Take a look at the weekly chart of DIA below:
In addition to the impending “make or break” resistance of the weekly downtrend line, you may have also noticed that DIA has been forming an ascending triangle formation on its weekly chart. This means that if DIA breaks resistance at 85.45, it will have not only broken its weekly downtrend line, but it will also have broken a triple top AND will be on pace to follow through with the upside momentum of an ascending triangle. Based on the height of the triangle, which predicts the amount of the move, the target on DIA would be just over $90, near the prior high that was set in December 2002.
The key weekly trendline resistance levels in SPY and DIA are probably the most important thing to watch over the next few days. If both SPY and DIA break their downtrend lines simultaneously, it is likely to spur a multi-month “mini-bull rally” in the broad markets, especially because the Nasdaq is already leading. However, it’s not time for you bulls to party yet because we don’t have the necessary confirmation. But if SPY rallies above 92.35 and DIA gets above 85.45, we should see smooth sailing where we can set our trailing stops and shoot for the prior highs of last December. No matter what, ALWAYS REMEMBER TO TRADE WHAT YOU SEE, NOT WHAT YOU THINK!
Today’s watch list:
DIA – DIAMONDS (Dow Jones Industrial Average Tracking Stock)
Trigger = above $85.47 (above triple top on daily chart)
Target = $88.85 (high of year-to-date, set in January)
Stop = $84.90 (below breakout point)
Notes = Now that the Dow is showing signs of life, we’re watching for a break of the triple top, which would also confirm break above the weekly downtrend line resistance.
SPY – SPYDERS (S&P 500 Index Tracking Stock)
Trigger = above $92.41 (above high of last week)
Target = $93.80 (high of year-to-date, set in January)
Stop = $91.75 (below yesterday’s close)
Notes = Another breakout play, if SPY can get some momentum going.
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.
IEF short (1/2 position from April 9) –
shorted 85.87, covered 86.26, points = (0.39), net P/L = ($84)
WMH long (from April 23) –
bought 34.85 (avg.), stop RAISED to 33.50, target at 39.25, unrealized points = (0.30), unrealized P/L = ($31)
WMH has an updated stop above. We were stopped out of IEF short yesterday morning due to an opening gap in the bonds. Will look for re-entry if we get more confirmation.
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, EWJ, SPY, and QQQ (which each have unrealized gains) are not reported above and are updated with commentary in the room. If you are an active intraday trader, consider joining us online in the ETF Real-Time 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)
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
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
SOH = Sit On Hands (Don’t Make Trades)
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.
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