The Wagner Daily | May 6, 2003

Commentary:

After last week’s breakout in the broad market, the major indices
corrected by time yesterday as they traded in a narrow consolidation pattern
near the highs of the previous day. As you know, markets don’t go up (or down)
in a straight line and yesterday’s sideways trading in the S&P was more
bullish than a correction by price (retracement). Sideways consolidation
patterns are healthy for markets because they allow the intraday moving averages
to rise up to provide price support from which to make another leg higher. When
markets form a parabolic rally without any type of correction, the gains are
usually more short-lived than markets in which the uptrends are more gradual.
Total market volume in the NYSE was lighter yesterday than on Friday’s breakout
day, which is what you want to see on a consolidation day because it indicates
that sellers are not aggressively stepping in. Volume in the Nasdaq was higher
than on Friday, but the Nasdaq also closed higher (by one point) and spent most
of the day in an uptrend. The advancing volume to declining volume ratio was
also positive in both the NYSE and Nasdaq. Overall, the markets acted much as we
would expect to see after a breakout.

Although the S&P and Dow
closed slightly lower yesterday, relative strength could be seen in the Nasdaq,
particularly in the technology sector. This relative strength enabled the Nasdaq
to open above the previous day’s high and trade in an uptrend during the morning
session, but minor selling in the afternoon caused the Nasdaq to give backs its
gains and close flat. As you may recall from our previous analysis, the Nasdaq
has had less overhead resistance than both the S&P and Dow because it is the
only of the major indices that is already trading above its January highs.
Unlike the Nasdaq, the Dow and S&P are still trading BELOW their highs of
January 2003, despite having broken above their multi-year weekly downtrend
lines. This essentially means that anyone who wanted out of the tech stocks has
already sold, but there are still sellers remaining from January overhead supply
of the S&P and Dow.

Below are daily charts of each of the three
major broad-based ETFs. In each chart, I have labeled yesterday’s high, the
January high, and last December’s high. As you review these charts, notice how
yesterday’s high in QQQ was within pennies of its December 2 high, while
yesterday’s high in SPY was within pennies of its January 13 high. This clearly
illustrates the importance of watching prior “swing highs” as resistance levels.
Therefore, I recommend you study each of these charts and write down the “swing
high” prices that are acting as resistance in each of the major indices. By
having these key pivot points written down and lying in front of you during the
trading day, you will be fully prepared to buy on a break of resistance or sell
into a failed breakout because it is likely that each of the indices will test
their prior highs in the coming days. I have removed volume and all moving
averages from the charts below to enable you to focus solely on the horizontal
price resistance levels:

We’ve analyzed the resistance levels to watch with the commentary and
charts above, but what about support levels? Well, remember that a basic tenet
of technical analysis is that once a resistance level is broken, that prior
resistance level should act as the new support level. Since both SPY and DIA
broke above their multi-year weekly downtrend lines last week, those downtrend
lines should now act as support. For SPY, that level is around 92.50, which was
also yesterday’s low (funny how that works). For DIA, that level is around
85.50, which was yesterday’s close. Additionally, the high of the ascending
triangle that DIA broke above last week should also serve as support, right
around 85.50 (which is why we are long DIA as a swing trade). For QQQ, we expect
the shelf of price support around 27.75 to hold up pretty well in the short
term.

Although we could see a breakout above the consolidation today,
there are two relatively “big” events today that could keep the markets in a
holding pattern for another day. First, there is an FOMC Meeting today with a
decision on interest rates that will be coming at 2:15 pm. Wall Street is
assuming that there will be no change to interest rates, but any negative
comments by the Feds could become a shock to the system, so be aware of that. We
typically recommend closing all intraday trades before the Fed announcement at
2:15 pm EST because it tends to get quite volatile after the announcement,
regardless of what is said. In addition to the Fed meeting, Cisco (CSCO) reports
earnings after the close today. The results of Cisco’s benchmark earnings
usually set the tone for the entire technology sector, so just giving you a
heads up on that.

Today’s watch list:

SPY – SPYDERS (S&P 500 Index Tracking Stock)

Long

Trigger = HALF above $93.52, HALF above $93.90 (half above May 2
high, add above Jan. 13 high)
Target = $96.05 (prior high of December 2)

Stop = $92.40 (below yesterday’s low)

Notes = Trade is discussed in
commentary above. Make sure you use the MTG Opening
Gap Rules if SPY gaps up above its trigger price. This basically dictates we
will wait for a break of the 20-minute high before buying SPY if it opens above
93.52 (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:

net P/L = + $1

Open Positions:

unrealized P/L = ($120)

WMH long
(from April 23) –
bought 34.83 (avg.), stop raised to 34.50, target of
39.25, unrealized points = + 0.56, unrealized P/L = + $54

We are
still long 1/2 position of EWJ from 6.24, as called in the ETF Real-Time Room
over a week ago (listed here as a courtesy to non-subscribers). Japan’s Nikkei
continues to recover steadily and we have an unrealized gain of over 7% so far.

Notes:

Our trailing stop was hit on SPY yesterday, making
the trade a scratch. We may re-enter if the market breaks out again. Also note
the new stop on WMH.

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