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The Wagner Daily


Commentary:

As I was scanning through some financial news on the Yahoo! web site last evening, I came across a recap of yesterday’s market action, bearing the headline “Decidedly Undecided.” While I tried to think of something original to summarize the performance of the broad market yesterday, I could not think of anything more accurate than “decidedly undecided.” All three of the major indices we track (SPY, DIA, and QQQ) traded sideways within the relatively narrow range of the previous day, April 29. The S&P 500 Index (and SPY) tried to break upside resistance of the previous afternoon’s high numerous times throughout the day, but eventually failed within the final fifteen minutes of trading. The Nasdaq, which showed relative weakness to the S&P, did the opposite by testing support of the previous day’s low numerous times throughout the day. Because of the divergence between the S&P and Nasdaq, neither index presented clear intraday trading opportunities. Shorting QQQ failed because SPY kept pulling the Nasdaq higher, but buying SPY and DIA did not work either because the weakness in the Nasdaq kept dragging on the S&P. The bottom line is that you could have stayed in bed all day yesterday and not have missed a thing. Choppy and range-bound days are as much a part of “normal” market action as the occasional perfectly trending days that enable you to make boatloads of money. That’s trading!

Take a look at an hourly candlestick chart of SPY, which enables you to clearly see the indecision and lack of direction that has existed over the past two days:

Looking at the chart above, notice how many “tails” or “wicks” have formed both to the upside and downside. The downside tails indicate that buyers are stepping in every time the market tries to sell off, while the upside tails indicate that sellers are stepping in each time the market attempts to break out. The daily chart of SPY is now showing “double dojis” for the past two days, further confirming that many traders are scratching their heads right now. The chart below illustrates this:

Although the past two days have not presented many intraday trading opportunities for the broad-based ETFs, it is not surprising we are seeing this type of market action. As I have been drilling in your head for the past week, each of the major indices remain at a critical test of resistance right now. As you know, both the S&P 500 (SPY) and the Dow Jones Industrials (DIA) are sitting right at huge resistance of the upper channel of their respective weekly downtrend lines that have been in place for several years. For SPY, this level remains around 92.50, while the pivot point for DIA is around 85.45. Obviously, even if these key resistance levels are eventually broken, we cannot expect these major pivot points to be easily broken — hence the indecision. For the Nasdaq Composite (COMPX), the 1467 area, which keeps acting as resistance, remains the primary pivot point to watch. Rather than being redundant by showing you the DIA and SPY weekly charts again, you may wish to review this past week’s issues of The Wagner Daily for a visual reference on the weekly trendline resistance.

While it is very easy to get chopped up by attempting to trade the broad-based ETFs on consolidation days like yesterday, we also feel that a big move out of the short-term trading range will occur within the next day or two. The longer a market consolidates at a particular level, the stronger the move will eventually be when it eventually breaks out of the range. This is further compounded by the fact that every trader and technician in the world has his/her eyes glued to the weekly trendline resistance on the Dow and S&P. The consolidation at the highs of the past two days means that the S&P and Dow should eventually break out ABOVE the weekly trendline resistance. However, the relative weakness we have begun seeing in the Nasdaq is going to be a drag on the broad market. In order to prevent getting chopped up, we recommend you shift into “SOH mode” (sit on hands) until we see a clearly defined break to either direction. You will miss part of the move by not being the first person to buy the breakout or sell short the failure, but it will prevent numerous small losses in the event the consolidation continues for a few more days. It’s better to just attempt to catch the bulk of the move by taking a big chunk out of the middle rather than trying to pick a top or bottom.

Today is a big day for economic data. Jobless Claims, Productivity, ISM Index, and Construction Spending reports are all scheduled to be released this morning. The interpretation of this data could be what we need to finally push the market out of its trading range, so be ready for action on EITHER side of the market.

Finally, just a reminder that there are only 2 weeks left to register for the Live ETF Trading Workshop in Las Vegas, NV, which will be held on May 15 and 16. We’ve got a jam-packed educational session ready to go and you don’t want to miss it. Airfare is still inexpensive as long as you book two weeks in advance (try hotwire.com). Click here for more details or to reserve your seat.


Today’s watch list:

We are not posting any new trade setups for today because we want to see the broad market resolve the current consolidation first in order to prevent getting chopped up. However, we will send you an e-mail alert when/if we enter any low-risk swing trades that meet the requirements of The Wagner Daily. In the interim, we will just focus on managing our open positions in WMH, TTH, and EWJ (the latter two were originally called in the ETF Real-Time Room).


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:

    DIA long (1/2 position from April 30) –
    bought 85.25, sold 84.88, points = (0.37), net P/L = ($40)

Open Positions:

    WMH long (from April 23) –
    bought 34.83 (avg.), stop at 33.50, target at 39.25, unrealized points = (0.10), unrealized P/L = ($11)

    Long TTH and EWJ (both called as swing trades in the ETF Real-Time Room, but listed here as a courtesy to non-subscribers of the ETF Real-Time Room)

Notes:

We lowered our buy trigger on DIA to 85.25 yesterday and bought a 1/2 position when it triggered. However, it was stopped out for a small loss when the breakout failed once again. We only bought 1/2 position initially because we wanted the market to confirm the breakout before getting aggressive on share size. This effectively cut our capital loss in half.

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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