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The Wagner Daily


Commentary:

Not surprisingly, we saw follow-through to the downside of the weakness
we saw on May 7 and each of the major indices closed near their intraday lows.
The head and shoulders pattern of QQQ that we discussed in yesterday’s Wagner
Daily
broke the neckline and completed the pattern to the downside.
Unfortunately for those of us who were cash overnight, most of the selling came
in the form of an opening gap down rather than a flat opening followed by an
intraday downtrend. While opening gaps are great if you have open positions on
the correct side of the market, they often make it difficult to profit from
intraday trading of the broad-based ETFs because gaps tend to skew the
risk/reward of intraday trade setups. In the case of yesterday, the opening gap
down was immediately followed by an upside reversal which filled the gap.
However, the filling of the opening gap also marked the high of the day and,
after a failed consolidation attempt, the major indices rolled back over to
their intraday lows in the middle of the afternoon doldrums. Because of the
solid level of price support at the morning lows, the major indices formed a
double bottom and chopped around near the lows throughout the rest of the day.
Since yesterday was not a trending day, we entered positions in several
individual sectors that were showing relative strength rather than trying to
trade the choppy broad-based ETFs such as SPY, DIA, or QQQ.

When
following intraday trends of the broad-based indices, one of the most reliable,
yet simple, technical indicators to follow is the 20-period simple moving
average (SMA) on the 15-minute chart. In it’s most simple form, you can use the
20-MA/15 min. as a basic indicator to assist in determining whether to be long
or short the market on any given day. Simply put, odds favor higher prices if
the index is trading above the MA, while your odds are probably better on the
short side if the index is trading below the 20-MA. When the major market
indices are in trending periods, as they have been for the past several months,
the 20-MA/15 min. tends to act as either price support or resistance, depending
on whether the index is trading above or below the moving average. Astute
traders can initiate short positions when a particular index rallies into the
overhead resistance of the MA (and go long when an index drops down to the
20-MA). By setting a stop just above or below the moving average, your
risk/reward is very positive because you are only risking a small amount if you
the moving average becomes broken, but are enabling significant profits if the
trend continues in the direction of the moving average. Yesterday action in SPY
was a good example of the power of this 20-period moving average on the 15
minute chart. On the chart below, notice how the 20-MA acted as perfect
resistance several times throughout the day:

Despite the lower closing prices of yesterday, the major indices held up
well and did not show many signs of heavy distribution (institutional selling).
Primarily, the total market volume in both the NYSE and Nasdaq was significantly
lighter than we have seen during the past week. Yesterday’s volume in the NYSE
was 1.32 billion shares, which was about 10% lighter than the average daily
volume of the past five days. The Nasdaq volume was about 13% lower than its
5-day average. This tells us that yesterday represented a lack of buyers rather
than an abundance of sellers. In other words, the buyers were simply on strike.
Why is this significant? It’s important because careful analysis of total market
volume tells us whether a multi-week broad-based rally, such as the current one,
is near a top or whether it is likely to continue higher. If, for example,
yesterday’s volume was higher than the volume of the prior “up days,” it would
indicate the presence of institutional selling, which in turn would give us a
“red flag” with regard to the likelihood of the rally’s continuation. However,
since volume of the past two days was lighter than the volume of the most recent
“up” days, it indicates to us that the rally is still intact.

Going into
today, we still feel pretty confident about the market’s ability to resume the
daily uptrend and are viewing the action of the past two days as a simple price
correction. In addition to the volume analysis, which indicated a lack of heavy
selling during the correction, you may have also noticed that the broad-based
indices are each sitting on relatively firm price support from April. As you
know, prior resistance levels become the new support levels once the resistance
level is broken. The hourly chart of SPY below clearly illustrates this concept:

Notice how the prior resistance from April acted as support
during yesterday’s selloff. Barring a large opening gap down, this level is
likely to continue providing price support in the coming days. Similar support
levels can be seen on both QQQ and DIA. More importantly, each of the major
indices are still above the lower channel support of their daily uptrend lines
which began in mid-March. The daily chart of SPY below illustrates that the
uptrend line is still clearly intact:

As we enter today, remember that our job is NOT to predict
whether the market will go up or down in the future because it really doesn’t
matter to us! Rather, our goal is to simply interpret what the charts are
telling us and trade in the direction of the prevalent trend. Therefore, while
the current uptrend could fail at any given time, we need to assume the current
uptrend will remain intact until the market provides us with facts to the
contrary (such as a break of the primary uptrend line, heavy selling volume,
etc.). Since the major indices are nearing support of the lower channel of their
uptrend lines, we expect to see a slight positive bias to the market today,
although our best educated guess tells us that we probably will not see any
strong resumption of the uptrend until next week, after the market has digested
the correction. If the broad-based ETFs are choppy, remember that there are
several sector ETFs that are showing relative strength to the broad market. If
you can select the right ones, as I believe we have done with our long entries
in OIH, BBH, and XLP yesterday, your risk is lower than trading the broad-based
ETFs and your potential rewards are higher. Just remember to ALWAYS use and obey
your stop losses in case you’re wrong.


Today’s watch list:

There are no
additional ETFs on the watch list today since we are already in three open
positions. Will send you an e-mail update if we spot any additional
opportunities with a good risk/reward ratio.


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:

    OIH long (from May 8) –
    bought 58.20, stop at 57.30, target of 60.90,
    unrealized points = + 0.88, unrealized P/L = + $85

    XLP long (from
    May 8) –
    bought 19.29, stop at 19.10, target of 20.00, unrealized points =
    (0.10), unrealized P/L = ($42)

    BBH long (1/2 position from May 8)

    bought 100.25, stop at 99.10, target of 103.90, unrealized points =
    (0.66), unrealized P/L = ($34)

Notes:

We
adjusted the entry prices in both OIH and XLP yesterday and notified subscribers
per an intraday e-mail alert. We also bought a half position of BBH yesterday
and sent e-mail alert to that extent. Note that we are only long a HALF position
of BBH because we did not get much confirmation of the timing of our entry. We
will, however, consider adding to BBH upon confirmation, which would occur on a
break of yesterday’s high. By starting with only a half position, our risk is
minimal if our timing is wrong, but it still enables us to realize a profit if
we are correct.

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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