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The Wagner Daily


Commentary:

This bull market is incredibly resilient and no amount of negative economic or corporate news seems to be able to keep the market down for more than an hour. Yesterday began with an opening gap down of 1.3% in the Nasdaq and 0.8% in the S&P and it appeared the major indices would finally see a price correction. Given the fact that the Nasdaq had gained nearly 10% with only one losing day within the past nine days, a price retracement would have been completely normal and was expected. On top of that, the Factory Orders report which was released at 10 am EST missed expectations with a 2.9% drop, instead of the 1.9% drop that was expected by Wall Street. In fact, the April Factory Orders report was the worst since November of 2001. Nevertheless, the sellers could not keep the market down for long. By the middle of the day, the major indices had crawled back to the flat line, handily erasing the morning losses. From there, the market chopped around throughout the rest of the afternoon before creeping slightly higher into the final thirty minutes of trading. Although the major indices closed higher, yesterday was choppy and filled with false breakouts AND breakdowns. This made it difficult to profit from intraday trading on both the short AND long side of the market. The only easy way to profit from yesterday’s trading activity would have been to buy (fade) the opening gap down and trail a stop higher throughout the day. However, we think the risk of buying yesterday’s gap down was very high given the huge gains and the fact that the market was due for a correction.

Even though the major indices continue pushing up against the upper channel of their daily uptrends, I don’t want to talk much about that today. We have been talking about the upper channel of the daily uptrend as being resistance for the past few days, yet the market continues to ride along the upper channel without correction. So, rather than being redundant, let’s look at something different today. Let’s take a pure technical look at what sparked this strong rally in order to better understand why it is so strong. We will begin by taking a look at a weekly chart of the S&P 500, going back to the beginning of the bear market in the year 2000. I have removed all the moving averages and volume bars to allow you to focus on the trendlines:

Until the end of April 2003, you can see there was a clearly defined downtrend line that had been in place since August of 2000. Because of this orderly downtrend line, investors and traders have grown accustomed to simply selling short any rallies because each rally attempt since August of 2000 eventually resulted in lower lows being set after running into the trendline. Many hedge funds, in particular, simply sold short and stayed short for long periods of time. There were even a select group of “hedgies” who were wise enough to get short near the beginning of the bear market and remained short for several years. However, things changed in 2003.

Our first clue that the market was running out of sellers occurred when the S&P formed a triple bottom in March of this year (circled in purple above). This should have been a warning sign to bears, and long-time subscribers to The Wagner Daily will recall our previous discussion about this triple bottom as well. Since a triple bottom by itself is not enough confirmation to say that a bear market has ended, the next thing we looked for was a higher high to be set. This occurred with the break of the primary weekly downtrend line (the thick blue line on the chart). The break of this trendline came at the end of April, a little more than one month ago. When that occurred, we became very bullish on the intermediate term trend of the market and began making rather aggressive plays on the long side of the market. These bullish transactions enabled the months of April and May to become two of our most profitable months since inception. Since many big players on the Street had their buy stop orders set above that trendline, the short covering has additionally been propelling the markets.

As you know, we maintained both a short and intermediate-term bullish stance from the March 12 lows all the way until the S&P rallied up to the 965 area (the pink horizontal line). At that point, we expected a short-term price correction to occur due to several key points of resistance (circled in red). So, when the S&P rallied up to the 965 resistance level, we began testing the waters on the short side of the market at the end of last week because this type of price resistance would normally generate a price correction. However, the correction never came and the S&P ripped through 965 within one day. Since then, the S&P has had a parabolic run to yesterday’s close of 990, which is why we have taken a few hits on the short side during the past week. There was too much momentum for the resistance level to hold. However, this means the 965 level now becomes the NEW SUPPORT LEVEL when/if the S&P sees a correction. Since we remain intermediate-term bullish on the S&P, we will be using a pullback to the 965 level as a chance to enter long positions with much less risk than buying at current prices. The dotted line indicates the next major level of resistance on the S&P, right around 1050.

When the broad market was fiercely selling off in the middle of 2002, many traders and investors were saying “How much lower can this thing go? It has got to bounce soon!” Yet, it kept going lower and lower, sometimes without much of a bounce for weeks. Well, it seems to me we are seeing the same phenomenon now, except in reverse. Very strong phases of both bear and bull markets often do not know price corrections, as we have seen in both directions during the past year. It’s clearly obvious that this bull market has some very strong legs! A 2% to 3% price correction will probably happen soon, when the least number of investors expect it, but the market is NOT likely to stay down for long. Like we mentioned yesterday, continue trailing stops higher if you are already long the market. If you are cash, consider waiting for at least a small price correction. If you are short, consider covering your positions into the first price correction or simply take your losses now and look to re-enter your shorts at a better price. Just don’t fight the market right now because it is quite strong, whether you agree with it or not!


Today’s watch list:

We have no new trade setups for today. All the daily charts are very overextended at this point, making it very high risk to initiate new long positions at the current prices. However, there are also no short setups yet because the market has shown us it is NOT yet ready to correct. Therefore, we feel that cash is the lowest-risk play until we see signs of either a correction through a price retracement or a consolidation period. If you enter any new trades today, keep tight stops because it is a Friday and traders may want to take profits going into the weekend.


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:

    EWJ long (sold half of the double position) –
    bought 6.83 (avg.), sold at 7.02, net points = + 0.19, net P/L = + $128

    MDY short (from June 5) –
    shorted 87.85, covered at 88.45, net points = (0.60), net P/L = ($63)

Open Positions:

    EWJ long (one full position still open) –
    bought 6.83 (avg.), stop at 6.75, target of 7.70, unrealized points = + 0.20, unrealized P/L = + $148

    HHH short (from June 3) –
    shorted 36.65, stop at 37.90, target of 34.80, unrealized points = (0.75), unrealized P/L = ($152)

Notes:

We sold half of our double position in EWJ yesterday, netting a 4% gain. Even though the gain was only 19 cents, remember that our position size on EWJ is large because the multiplier ratio is 4 times the size of a SPY position (consult the MTG Position Sizing Model for more details). We also had two shorts in the afternoon (DIA and SPY) that resulted in small losses, but they will be reported in the next weekly newsletter since they were initially called 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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