The Wagner Daily | May 20, 2003

Commentary:

As
expected, the major indices finally broke out of last week’s narrow-range
consolidation in the form of an opening gap down, followed by a steady intraday
downtrend. Yesterday’s selloff caused the broad market to break support of its
lower channel of the uptrend line that began in mid-March. As a result, the
intraday downtrend was smooth and steady without significant price retracements
during the day. This enabled us to sell short the major indices in the morning
and ride them lower the entire day through the use of trailing stops. Rather
than waiting for QQQ to break below its initial trigger price, we shorted into
the small opening rally into resistance (also known as “fading”) because it
offered a better risk/reward ratio. We sent an e-mail alert to notify
subscribers of the change. MDY short also triggered a few minutes after the
open. We then trailed a stop lower for the remainder of the day, incrementally
locking in profits along the way. By the end of the day, we netted nearly 3
points of profit from three different short setups, enabling us to have one of
our most profitable days of the past several weeks. Despite the fact that the
major indices got whacked, yesterday was an excellent trading day because the
intraday trend was so smooth. The great thing about being a short-term trader is
that you can often profit from intraday downtrends just as easily as uptrends.
The most important thing is just to have a trend, which we certainly did
yesterday.

If you have been paying attention to our daily analysis on
total market volume over the past week, yesterday’s selloff should not have come
as a surprise to you. In fact, we were sitting in cash as the day started, ready
and waiting to short the selloff. Last week’s volume distribution, as well as
Friday’s sudden weakness in the small caps, pointed to a probable break of the
two-month uptrend. If you failed to pay attention to the market’s volume
patterns last week, it would have been easy to misinterpret the consolidation
period as a correction by time that was likely to precede another leg higher in
the market. However, through precise analysis of volume, we expected the
opposite because of the pattern of light volume on the May 12 breakout, followed
by four days of higher volume without correspondingly higher prices. Unlike many
technical indicators, volume never lies! Yet, it’s amazing that many traders
fail to pay close attention to volume during their daily market research
routines.

As mentioned earlier, yesterday’s selloff caused each of the
major indices to break trendline support of their uptrends that began on March
12. As a result, we are likely to see continuation of the selloff during the
next several days because each of the major indices will probably correct down
to at least to the first Fibonacci
support level of 0.382. This equates to a roughly 1/3 price correction from
the low of March 12 to the highs of last week. The daily chart of the major
broad-based ETFs below illustrate the clear break of support, as well as the
first Fibonacci support levels. Notice that although QQQ broke below its primary
uptrend line, it is the only one of the three indices that is still above
support of its uptrend line from the March 12 low:

Remember that basic technical analysis states that once a support level
is broken, that prior support level now becomes the new resistance level.
Therefore, any attempt by the market to rally up to its prior trendline support
(the thick blue line) should present a low-risk short-selling opportunity. As
you can see from the charts above, not only did SPY, DIA, and QQQ break support
of their daily uptrend lines, but they also broke below their 20-day moving
averages. This will create further overhead resistance unless the market
suddenly pops back above those levels.

Do I think the market will go
back down to the lows of the year? Probably won’t happen any time soon, but it
really doesn’t matter to me and should not matter much to you either. As a
short-term trader, all we are concerned about is what is likely to happen over
the next several hours or days, and the charts are telling us the market is
likely to trend lower the next several days, at least until the first Fibonacci
support levels. At that time, we will re-assess total market volume to determine
whether or not the major indices are likely to bounce off of support and head
back up to the highs. In the interim, we are looking to sell short into any
strength unless the market proves otherwise. As always, remember to TRADE WHAT
YOU SEE, NOT WHAT YOU THINK.

Today’s watch list:

QQQ – Nasdaq 100 Index Tracking Stock
Short

Trigger =
ABOVE 27.95 (a bounce to just below first intraday Fibo resistance)
Target =
27.10 (just above daily support)
Stop = 28.40 (above 0.618 Fibo retracement)

Notes = Looking to re-enter QQQ short on a bounce into resistance. So,
we’ll see if we can get a little upside price correction and will sell short
into strength to reduce risk.

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 = + $184

MDY short (from May 19) –
shorted
82.84, covered 81.96 (avg.), points = + 0.88, net P/L = + $85

Open Positions:

(none)

Notes:

In addition to the profits from MDY and
QQQ shorts (of which QQQ hit its target in one day), we also netted about 1.40
points of profit from a full position of SPY short. Since the SPY trade was only
called in the ETF
Real-Time Room and not as a trade setup in yesterday’s Wagner Daily,
the $280 profit will be reported in the next weekly newsletter rather than
above. Overall, we managed yesterday’s three trades to result in a very
profitable day.

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