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The Wagner Daily


Commentary:

The major indices began the day yesterday with an opening gap up above
the previous day’s close, but, not surprisingly, the bounce was short lived and
the gaps did not hold. We expected the S&P and Dow to close lower yesterday,
which they did due to Monday’s break of the two-month uptrend. However, we also
knew that, because of the severity of the previous day’s selloff, prices were
likely to correct yesterday morning before setting new lows. That correction
came in the form of a small opening gap and subsequent consolidation in the
lower third of Monday’s trading range. Remember that markets can either correct
by price or time and yesterday’s sideways trading at the lows of May 19 was a
correction by time that allowed the major intraday moving averages to descend
down to meet the prices of the market. This accomplished the same effect as if
the market rallied into resistance yesterday morning except that trading
sideways at the lows is even more bearish than if the market corrected by price.

We used the morning correction s an opportunity to get short so that we
were already short the market when the break to new lows came later in the day.
As trading entered the afternoon session, the major indices followed through on
the May 19 selloff and each broke to new intraday lows and also broke below
support of the May 19 lows. This triggered an afternoon downtrend that lasted
until the final 45 minutes of trading, at which point the market saw a small
surge of buying that caused the major indices to close near the middle of their
intraday trading ranges. We micro-managed our short positions through the use of
tight trailing stops and incremental buying and selling. This enabled us to
realize decent profits on the day, despite the reversal into the close. Below is
a 15-minute chart of SPY (S&P 500) which illustrates yesterday’s correction
by time and subsequent follow-through to new lows:

The breakdown to new lows yesterday afternoon after consolidating at the
lows of the previous day was no different than when you see a market break out
to new highs after a period of consolidation at the highs of the previous day.
Both scenarios represent a correction by time that occurs when prices get too
far ahead of themselves. Therefore, technical analysis works the same way
whether the market is uptrending OR downtrending. This enables us to use the
same concepts to profit equally in bull and bear markets. To prove this, take a
look at the exact same chart of SPY as shown above, except this time it is
flipped upside down:

Although it may sound silly, I have often found that flipping
a chart upside down is a good way to see if I am properly assessing the chart
with an unbiased view. So, perhaps you may want to begin doing that if it will
help you in keeping a clear picture during downtrending periods.

Another
thing I found interesting yesterday was that the high prices of both SPY
(S&P 500 Index) and DIA (Dow Jones Industrials) yesterday were EXACTLY equal
to the resistance of their 20-day moving averages. Since the 20-day MA formerly
provided price support, it has now become a new resistance level. The high of
SPY yesterday was 93.03 and the 20-day MA is at 93.02. Likewise, the high of DIA
yesterday was 85.65 and the 20-day MA is at 85.63. Pretty amazing that the
20-day MA stopped the rally in both SPY and DIA dead in its tracks! Unlike SPY
and DIA, QQQ was relatively weaker and did not even trade up to its 20-day MA.

So far, we’re seeing a pre-market gap down in the futures which will
probably cause the broad-based indices to test support of yesterday’s lows. If
the lows are broken, there’s a good chance we will see the 0.382 Fibo
retracement levels we illustrated a few days ago. However, we could also see a
choppy day because Greenspan is speaking this morning at 9:30 am EST. We’re
short QQQ and SPY overnight and it’s looking good so far, but we will watch
closely and use tight trailing stops to insure the market does not form a double
bottom off of yesterday’s lows. But for now, the bias going into the day is
negative.


Today’s watch list:


EWJ – iShares Japan Fund
Long

Trigger = above 6.75
(above yesterday’s high and 20-week MA)
Target = 7.15 (resistance of 50-week
MA)
Stop = 6.55 (failure of 20-week MA break)

Notes = We’ve been
stalking EWJ ever since we sold into strength for an 8% gain a few weeks ago. It
has now corrected and is showing signs of heading back higher, so we’re ready to
re-enter if it confirms. Make sure you consult the MTG Position Sizing
Model
for proper sizing.


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:

    QQQ short (3/4 position from May 20) –
    shorted 27.75, covered 27.61
    (avg.), points = + 0.014, net P/L = + $33

Open
Positions:

    QQQ short (1/4 position from May 20) –
    shorted 27.69 (avg.), stop at
    27.85 (will trail lower), unrealized points = (0.08), unrealized P/L =
    ($10)

Notes:

QQQ was a bit tricky yesterday and we were
forced to scale in and out several times rather than simply ride the trade out.
Nevertheless, we took a small position of QQQ short overnight, as well as SPY
(as called only in the ETF Real-Time
Room
).

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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