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The Wagner Daily


Yesterday’s market recap will be brief today because there really is not much to say. The major indices opened with a small gap up, immediately sold off, filled the gap, then traded near and closed at the previous day’s closing prices. The S&P, Nasdaq, and Dow each closed within a small fraction of the flat-line. The Pharmaceutical sector was strong and closed just over 2% higher on the day. There was also relative strength in IWM (Russell 2000 Small-Cap Index), as we began to notice a shift back out of the large cap Dow-type stocks and back into the small caps. But, other than strength in the drug sector, there was not much happening. It was just a choppy and narrow-range day that made it challenging to profit from intraday trading of the broad-based ETFs, regardless of which side of the market you were on. In fact, the S&P futures spent most of the day in less than a 5-point trading range. Days like yesterday are okay if you are “swing trading” a few positions, but they’re not much fun for intraday traders.

The flat price action of yesterday provides us with two conflicting technical signals that you should be aware of. On one hand, yesterday’s sideways consolidation could be interpreted as bullish because the broad market was able to absorb all of the previous day’s gains without giving anything back. This would mean that the major indices simply corrected by time yesterday. However, the conflicting bearish signal is that yesterday’s total market volume was significantly higher than the previous day. In a healthy uptrend, volume on a consolidation day should be lighter than the previous day. Higher volume indicates that the market is “spinning its wheels,” but nothing is happening. While this alone cannot be construed as a definite signal that yesterday was a short-term top in the market, it is nevertheless a warning to follow volume closely today.

As I was thinking about the current technical state of the broad market last evening, I began thinking about how interesting it is that traders need to base their directional bias on the time frame in which they are trading. For example, if you have even remotely been paying attention to any daily charts of the broad market, you don’t need me to tell you that the major indices are technically overbought in the short-term. However, the longer-term weekly charts are clearly showing an intermediate-term breakout that can be sustained for several more months. Therefore, an investor who is typically in a position for several months at a time would be fully justified in being bullish right now, while a “swing trader” who remains in a typical position for only a few days at a time would be justified in having a neutral to bearish bias because the market has run so far in such a short period of time. Taking this a step further, even intraday traders can look at an intraday chart of the market and see completely different things, depending on what time interval they are trading. A “scalper” who is only in a position for a few minutes at a time may look at a 3-minute chart and be bearish, while another trader could look at an hourly chart of that same day and be bullish about “buying the pullback.” The reason for this is simple — different trading time frames require different analysis. A “scalper” looking to make a gain of 10 cents on a rally that lasts for two minutes probably does not care what the weekly charts look like. Likewise, a person who holds positions for a month or two at a time does not care what his position does over a 5-minute period (unless major news hits it). The reason I am sharing these thoughts with you is because it is very important for you to realize what type of trader you are. Are you typically in a position for a few minutes, hours, days, weeks, or months? Unless you clearly define the time interval you focus on trading, you will never be clear on which charts to put the most analysis into. Being a profitable trader requires a clearly defined trading plan, regardless of the time interval you prefer to trade.

The S&P and Dow continue to push along the upper channel of their respective daily uptrend lines, which they have been doing that for the past week. The market is just plain resilient and does not want to pull back, regardless of what the charts are telling us. Does this mean we should be bullish in the short-term? Not really, because we feel the risk/reward ratio of initiating new long positions here is not positive. However, remember that overbought can remain overbought for many days, and anything more than “dipping a toe in the water” on the short side is not advisable at this point either. If you are in cash, it is probably a good idea to remain that way for a few days until the market stops showing mixed signals. If you are already long, continue trailing stops higher to lock in gains. If you are short, keep those stops tight and remember you can always re-enter at a better price if you get stopped out.

On a fundamental note, there are a few important factors occurring right now that are affecting the markets. For one, remember that this coming Friday is QUADRUPLE witching options expiration day. This means that options contracts for indexes, stocks, futures, and single stock futures will be expiring for the month and second quarter. Normal monthly option expiration days typically create erratic volatility on the third Friday of every month, but quadruple witching days create an even more wild ride. This occurs as “big money” enters large positions in the market in order to move their underlying instruments towards their options’ respective strike prices. As we near Friday, this will play more of a factor, but Friday afternoon especially is likely to be very tricky for intraday traders.

In addition to options expiration, the end of June marks the end of the second quarter for mutual funds. This means we are likely to continue seeing “window dressing” through the last day of the month. “Window dressing” is what occurs when mutual fund managers purchase all the “hot stocks” of the past quarter so that they can gleefully give the illusion to their fund holders that they have held positions in the “hot stocks” throughout the entire quarter. Nevermind the fact that they bought them at their highs, just as long as they can demonstrate that they own them in their funds. You mean they actually do that? Oh yeah! This means that the stocks that have been hot all quarter are likely to remain that way throughout the rest of the month. This will probably create some great shorting opportunities in sectors such as the Biotechs and Internets because they are being artificially inflated right now. But, we will probably need to wait until July for that.

On a final note, keep an eye on the software sector today (SWH is the HOLDR). Microsoft began showing signs of strength yesterday after being a laggard throughout this entire rally. Furthermore, Oracle increased their bid price for Peoplesoft today, which is likely to spark an interest in the whole sector. So, there may be a long play in SWH or individual software stocks if the broad market holds up today. On the downside, EK (Eastman Kodak) issued a profit warning before the bell today and, since it is a Dow component, we may see pressure on DIA (Dow Jones Average). The entry price on DIA for a short is not very clear, but you may want to put DIA on your watchlist for potential short today if it breaks yesterday’s low. Other than that, remember to trade in your preferred time frame and always “TRADE WHAT YOU SEE, NOT WHAT YOU THINK.”

Today’s watch list:

SWH – Software HOLDR

Trigger = above 34.05 (above the June 6 high)
Target = 35.60 (resistance from May 2002)
Stop = 33.40 (below yesterday’s close)

Notes = See comments in commentary above regarding the Software sector. Also remember you can follow the tracking index for SWH, which is $XWH.X. This will give you a more accurate idea of the fair value if the spread is wide.

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:

    SMH long (1/2 position size from June 16) –
    bought 29.04, sold 29.22, net points = + 0.18, net P/L = + $24

Open Positions:



Although we initially had a much higher price target on SMH, we sold into the gap up yesterday morning because the semis were showing too much relative weakness and we wanted to lock in a small gain rather than take a loss. We can always re-enter if the sector begins showing strength again, but it was better to lock in the profits. We did not buy the WMH setup yesterday because the broad market was not acting well enough to confirm the entry in WMH for a swing trade. We were flat overnight.

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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