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The Wagner Daily


The major indices gapped up into the middle of the previous day’s range, where they consolidated for the first thirty minutes of trading. Although the Nasdaq futures showed relative weakness and filled the opening gap, the S&P futures and the Dow both showed relative strength and held up into the first reversal period. When it became clear that the S&P was not going to fill the opening gap, we quickly covered our short positions (from Friday) into the first minor retracement. This turned out to be a wise move because, much to the surprise of many traders, the S&P and Dow ripped sharply higher and actually broke above the highs of last Friday within the first 90 minutes of trading! As we have been seeing, the Nasdaq lagged and was unable to break Friday’s highs during the morning session. The major indices subsequently corrected by time, consolidating near the highs for the next several hours, before breaking out again into the final 90 minutes of trading. When the dust settled and the closing bell rang, each of the major indices closed at their intraday highs. DIA (Dow Jones Industrial Average) and SPY (S&P 500 Index) both closed ABOVE resistance of their June 6 highs, setting new 11-month highs. The last time both SPY and DIA were trading near yesterday’s closing prices was on July 20, 2002, nearly one year ago. QQQ (Nasdaq-100 Index), as well as COMPX (Nasdaq Composite), both set new closing highs of the past 52 weeks, but FAILED to trade above their intraday June 6 highs. Therefore, the intraday highs of June 6 will continue to act as the next resistance level on both the Nasdaq Composite and the Nasdaq-100 Index.

Yesterday was a great reminder to all of us that, no matter what the charts are telling you, the market is ALWAYS right and will ultimately do what it wants to. As you know from our analysis in yesterday’s Wagner Daily, the technicals all pointed to flat to lower prices going into yesterday morning. However, it did not matter because the market ripped the other direction and set new closing highs of the year. Does this mean that technical analysis does not work and we should throw it out the window? Of course not! Technical analysis DOES work very well and it always has. But you have to remember that the goal of using technical analysis in our trading is simply to put the long-term odds and probability for success in our favor. This means that while a majority of our trades are profitable over the long-term, we never know whether the next individual trade we enter is going to be a winner or not. That’s why you need a solid risk management plan for exiting trades when you are wrong. You simply cannot be a profitable trader through reliance on technical analysis alone if you do not also have a solid plan for micro-managing each and every trader you enter. Although we were stopped out on our short positions going into yesterday morning, I would enter those exact same trades again if I had the chance to do it all over again. Why? For two reasons. . . 1.) Because technical analysis provided me with solid reasons for entering the trade 2.) Taking the stops prevented (and will always prevent) any major losses from occurring. Professional traders never worry about whether each individual trade is profitable or not; rather, they simply focus on putting the long-term odds for success in their favor through the combination of thorough technical analysis and solid risk management. As an example, we gained more on Friday than we lost yesterday. As long as we continue to combine technical analysis with a solid risk management plan, we are likely to remain profitable traders for an indefinite period of time.

After closing our short positions yesterday morning, being in cash enabled us to re-assess the market with a clear head so that we could look for the next profitable trading opportunity in the direction of the market. When it became clear that the market was positioned to go higher later in the afternoon, we bought a half position of SMH (Semiconductor HOLDR) because it was a solid setup for a swing trade on the long side. Living by the trading mantra of “trade what you see, not what you think” enabled us to remain nimble and mentally make the transition from being short to getting long all within the same day. Even though the Semiconductor Index had been weak in the preceding days, the daily chart of SMH showed a low-risk entry point due to yesterday’s bounce off of the primary uptrend line. The daily chart of SMH below illustrates why we entered the trade:

As you can see from the chart above, SMH not only bounced off its trendline support yesterday, but it also closed back above its 20-day MA. It also formed bullish hammer candlestick formation. We bought SMH after it confirmed it was going to hold the lows of the day and upon rallying back above resistance of the 20-day MA. We further managed risk by entering with only an initial 1/2 position size. In trending markets, such as the one that SMH has been in for several months, we need to assume that the trendlines will remain intact until the market proves otherwise. Since SMH held support of the trendline, that is the lowest risk place for entry on the long side because we simply set our stop just below the trendline. This provides us with a positive risk/reward ratio on the trade.

As long as the S&P remains above the 1000 level, our overall bias would be towards buying the pullbacks rather than shorting the rallies. The bottom line is that the S&P and Dow both closed above significant price resistance and you have to go back a full year to find overhead supply anywhere. The market is still technically overbought, but overbought conditions can remain that way for a long time, especially if market sentiment is bullish enough. Therefore, as long as the broad market holds yesterday’s gains and does not trade down into yesterday’s range within the first hour of trading, I see no reason you cannot be long AS LONG AS YOU USE TIGHT STOPS. If, however, the major indices fail to hold yesterday’s breakout above the June 6 highs, use extreme caution on the long side because we have seen these types of false breakouts that can sometimes get slammed back down very hard. So, don’t fall in love with either side of the market at this point. Being cash is not even a bad idea right now. I think that the word of the day must be “NIMBLE!”

Today’s watch list:

WMH – Wireless HOLDR

Trigger = above 38.55 (above yesterday’s high)
Target = 40.70 (resistance from last November)
Stop = 37.70 (below yesterday’s low)

Notes = The Wireless sector has been consolidating nicely and looks poised to make a run to new highs of the year, which would encounter resistance at the highs of last Fall. Many leaders of that sector, such as Nextel (NXTL), are breaking out of bases on their daily charts and that will take WMH higher if the breakouts hold.

Even though the average daily volume of WMH is low, remember that ETFs are synthetic instruments that track the underlying prices of individual stocks. Therefore, the ETF bid/ask price will always move in sync with the prices of the stocks that comprise it. So, don’t worry much about the low volume of this one. Also, remember that you can track $IWH.X, which is the index for the Wireless HOLDR, because it will show you a more accurate fair value of WMH because it does not have the spread.

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

Closed Positions:

    DIA short (1/3 position size from June 13) –
    short 91.77 (avg.), covered 91.90, net points = (0.13), net P/L = ($11)

Open Positions:

    SMH long (1/2 position from June 16) –
    bought 29.04, stop at 28.60, target of 30.30, unrealized points = + 0.16, unrealized P/L = + $22


Per intraday update e-mails, we bought a 1/2 position of SMH for a swing trade. We also covered DIA prior to hitting the stop in order to minimize risk. We also covered SPY and IWM yesterday morning, both of which were initially called in the ETF Real-Time Room and will be reported in the next Wagner Weekly.

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

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

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.

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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