The Wagner Daily | May 2, 2003

Commentary:

The tug-of-war between the bulls and bears continued yesterday as the major indices traded in a steady downtrend during the morning session, but formed an even stronger uptrend in the afternoon session. The morning selloff was prompted by economic data that came in below expectations, but the recovery in the afternoon demonstrated the resiliency of the market right now. When the closing bell rang and the dust settled, the S&P 500 Index (SPY) closed exactly where it opened, which is the same trick the S&P has pulled for three consecutive days. The Dow Jones Industrials (DIA) closed slightly lower on the day, while both the Nasdaq-100 Index (QQQ) and the Nasdaq Composite closed slightly higher. Most significantly, the Nasdaq Composite (COMPX) closed at 1472, ABOVE its key resistance level at 1467. This also marked a new closing (but not intraday) high of 2003. Overall, it was just another consolidation day, but with a wider, more tradeable intraday range than the prior two days. SPY has now formed three consecutive “doji star” candlesticks on the daily chart:

Yesterday was a good example of why it is important to always view each trading day as two distinctly separate sessions, one in the morning and one in the afternoon. When I was a new trader, I made the mistake of viewing each trading day as only one session, and I therefore expected morning trends to continue throughout the remainder of the day. Although this does occur about once per week (on average), a much more common occurrence is for the markets to trend one direction in the morning, but trade flat or in the opposite direction in the afternoon. The morning selloff and afternoon rally that occurred yesterday is a good example of the importance of mentally viewing each trading day as two separate days. Many professional traders discover that physically leaving their offices to take a lunch break each day enables them to think of the afternoon session as the start of a brand new trading day when they return to their offices. This also aides in “clearing your head” from the results of the morning session and mentally preparing you for the afternoon session. Yesterday, for example, we profited from two morning shorts in DIA and SPY, and then netted a gain by going long QQQ in the afternoon. Mentally viewing the trading day as two separate days enabled us to stay nimble and ready to switch sides at a moment’s notice.

Going into today, my thoughts on how to trade the markets are basically the same as yesterday. The major indices, although acting bullish, still remain in a tight band of consolidation. Unless you are an intraday “scalper” who is in and out of the market in a matter of minutes, the best risk/reward ratio is achieved by “sitting on your hands” until the markets make a clear and decisive break (either up or down) out of that zone. At that point, you could enter positions in the broad-based ETFs with a projected time horizon of several days because we are likely to see a multi-day move once the market eventually breaks out of its sideways pattern. Here are the key support and resistance levels (pivot points) to watch on the broad-based ETFs:

Volume, which is the most important technical indicator behind price, has been remained solid across the board. If you analyze broad market volume on an intraday basis during the past week, you will notice that volume has been higher during the uptrends than during the sideways and downtrends. This is exactly what you typically see in a bull market because it indicates more buyers than sellers in the market. When the sellers are washed out of the market, it does not take much volume to move the markets higher, and that is what sets uptrends in motion. The advancing volume to declining volume ratios also remain positive overall, especially in the Nasdaq, which has been showing relative strength to the S&P and Dow.

SPY – breakout at 92.80 (high of consolidation AND break of weekly downtrend line)

SPY – breakdown at 90.40 (break of daily uptrend line and yesterday’s low)
DIA – breakout at 85.55 (break of weekly downtrend line, 50-week MA, and ascending triangle)

DIA – breakdown at 83.40 (break of 20-day MA and hourly uptrend line)
QQQ – breakout at 27.90 – 28.00 (break of consolidation)

QQQ – breakdown at 27.10 (below yesterday’s low and support of daily uptrend line)

Although economic data in recent months has not been that great, the market seems to be interpreting recent corporate earnings reports as positive overall. Many small caps have once again turned a profit for the first time in several years and we are starting to see the results from corporations that have been getting “lean and mean” during the past year. This has enabled positive breadth during the recent rally, meaning that all industry sectors have been participating in the recent market gains. The equity markets are a discounting mechanism that usually lead economic data by several months, so it’s unlikely that today’s employment data and Factory Orders reports will have much of an impact (other than knee-jerk) if data comes in at or below expectations.

Today’s watch list:

QQQ – Nasdaq 100 Index Tracking Stock

Long

Trigger = above $27.90 (above yesterday’s high)
Target = $28.75 (prior high, set on December 2)
Stop = $27.60 (below yesterday’s low)

Notes = Just a breakout setup since the Nasdaq has been showing relative strength. Remember the MTG Opening Gap Rules in the event of a gap up above its trigger price.

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:

(none)

Open Positions:

unrealized P/L = ($15)

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:

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