The Wagner Daily | June 11, 2003

Commentary:

After a small opening gap up yesterday morning, the major indices traded sideways in a very narrow range, doing virtually nothing, until an end-of-day buy program pushed the broad market from the low of intraday range to new intraday highs during the final thirty minutes. The rally at the end of the day enabled the major indices to erase most of the previous day’s losses. The S&P 500, Nasdaq, and Dow each essentially closed at or slightly above the lows of the first selloff day on June 6. Though we had a small loss on one trade in the morning, we recovered the loss (unrealized) through a long position in SPY, which we bought during the end-of-day rally.

Although yesterday’s market action was boring for active intraday traders such as myself, the sideways action was actually a good thing because it enabled the market to “catch its breath.” As you know, markets typically don’t move straight up (or down) for any sustained period of time. Instead, a healthy bull market will rally for several days, correct for a day or two, then rally again. Corrections can be in the form of either a price retracement (pullback) or correction by time (consolidation). As you will recall from yesterday’s newsletter, the pullback that occurred on June 6 and 9 brought the major indices down to the 38.2% Fibonacci retracement level of the most recent leg of the rally. Then, the major indices traded held above that Fibonacci support level throughout yesterday’s session before popping higher into the close. In addition, total market volume was light yesterday, which indicates that the bulls were not rushing for the exit as the market traded sideways. Healthy bull markets will typically consist of higher volume on the uptrending days, then lighter volume on the sideways consolidation days, which is what we saw yesterday. Overall, the market continues to act exactly as it should during a bull market, but we need to continue watching for any additional signs of high volume “distribution days” like we had on June 6. An occasional distribution day in which the market closes lower on higher volume is normal, any such additional days would certainly be a red flag that could stop the rally dead in its tracks.

Going into today, it’s a good idea to use an hourly chart of the major indices in order to identify the primary trendline support levels. Below is an hourly chart of SPY that illustrates this:

Looking at the chart above, you will notice that trendline support is around 98.50 for SPY, which correlates to a level of about 980 on the S&P futures. If you look at an hourly chart of QQQ, you will see trendline support around 29.80 (around 1200 on the Nasdaq futures). For DIA, hourly trendline support is around 90.25. Surprise! This equates to a support level of 9000 on the Dow. I suggest you write down these key support levels and use them in your trading today. As long as the major indices hold above these levels, our bias is to the long side. However, if these levels are broken, it may be time to establish some short positions because the market could retrace to its 50% Fibonacci level.

Like yesterday, I would not be surprised to see another choppy or narrow-range day, which would enable the daily moving averages to continue rising up to provide price support. The key is to establish whether or not the market is likely to establish an intraday trend during the first hour of trading. If the major indices remain in trading range after the first hour of trading, we recommend you remain mostly in cash and wait for the market to make its next move. If the market has not established a trend within the first hour of trading, it will typically remain choppy until later in the session, around 2:30 pm EST. That being the case, there’s no reason to attempt to enter new positions because you are likely to get “chopped up.” However, if a series of higher highs and higher lows (or lower highs and lower lows) is established by 10:30 am EST, then you need to assume we will have a trending day and it’s okay to establish new positions in the direction of the trend. Just remember that patience and discipline are the two most important psychological elements of long-term profitability as a trader.

Texas Instruments (TXN) reported a profit warning after the close yesterday and it immediately put pressure on the Nasdaq futures in the after-hours market. The ability of the market to ignore the profit warning today would be considered quite bullish and would confirm such sentiment. However, I would not be surprised to see pressure on the Semis, and correspondingly the Nasdaq today. Fed Beige Book report will be released at 2:00 pm EST today, but that has not been much of a market mover lately.

Today’s watch list:

There are no additional trade setups today because we want to wait for the market to resolve the direction of its trend. As always, we will e-mail an alert if we enter any new swing trades today, based on intraday market action.

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 = ($38)

Open Positions:

unrealized P/L = + $36

EWJ long (half position) –
bought 6.83 (avg.), NEW stop at 7.10, target of 7.70, unrealized points = + 0.31, unrealized P/L = + $118

Notes:

We bought and sold SPY for a small loss in the morning, but re-entered half position of SPY in the afternoon and took it overnight. Will trail stop higher today. Also note the new stop for EWJ above.

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