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The Wagner Daily


Commentary:

Like most days when the Fed cuts interest rates, yesterday trading
session was rather volatile. The major indices opened flat, quickly rallied
above resistance of the previous day’s high, but subsequently remained in a
sideways holding pattern until the minutes leading up to the FOMC announcement
on interest rates at 2:15 pm EST. The morning breakout enabled us to profit from
a long position in QQQ, although the rally was limited due to pre-Fed jitters.
Immediately after the Fed announced a 1/4 point cut on interest rates, the
market became quite volatile and the S&P futures oscillated in a whippy
9-point range for the next hour. Although the futures whipsawed up and down
between support and resistance, selling pressure was prevalent and lower highs
were set during each bounce. In addition, there was bearish divergence in the
TICK reading because each plus 500 move higher in the TICK moved the futures
less than the equivalent negative 500 TICK readings. Going into the final hour,
the S&P futures finally broke the low of the three-day trading range at
975.50, which was set on June 23. The Nasdaq futures also closed below the low
of the three-day range, but only by one point, which is not yet enough to
confirm a clear break of support. An entire newsletter could be written
specifically on why the market sold off after the Fed announced a 1/4 point rate
cut, but let it suffice to say it was a combination of three factors: the
expectation already being priced into the market, disappoint over not cutting
1/2 point, and the cautious economic commentary that accompanied the rate cut.
Simply put, the Fed sees improvements, but corporate growth is still not fully
up to speed and deflation still remains a risk.

Despite yesterday’s
sell-off at the end of the day, past experience has taught us it is typically a
gamble to initiate new trades immediately after an interest rate cut. Since we
are “trend traders” and not “scalpers” who trade in and out of the market very
rapidly, the direction of the broad market after a Fed announcement is usually
difficult to predict with a high degree of accuracy. As such, we chose to sit on
the sidelines and allow the market to settle after the Fed announcement. It may
be boring sometimes, but that’s what many professional traders do in situations
such as yesterday. Before focusing on making profits, our primary goal is always
capital preservation because the profits will flow steadily, as long as capital
preservation is always achieved.

As we anticipated, yesterday was marked
by sector rotation out of the Dow-type stocks and back into the Nasdaq. The Dow
closed 1.08% lower, the S&P 500 closed 0.83% lower, and the Nasdaq Composite
only closed 0.18% lower. Interestingly, this is the exact opposite divergence we
have been seeing for the past several days in which the Dow had been closing
stronger than the Nasdaq. We profited from long positions in DIA and SPY when
those indexes showed relative strength, but profited from QQQ when the Nasdaq
began showing strength yesterday. By learning to closely monitor and track where
the “big money” is flowing, you can always increase your chances for
profitability and simultaneously decrease your overall risk. The daily goal for
Morpheus Trading Group is simply to be positioned long in the sectors or indexes
with the most relative strength and short those sectors or indexes with the most
relative weakness.

Taking a look at volume, our most important technical
indicator, we are seeing some mixed signals. Volume in the NYSE yesterday was
just over 3% higher than the previous day. Because the S&P and Dow both
closed lower on the day, this technically indicates a distribution day (lower
closing prices on higher volume). Distribution days are bearish because they
indicate institutional selling. However, it’s important to note that total
volume in the Nasdaq yesterday was nearly 4% LOWER than the previous day, making
the fifth consecutive day of declining volume in the Nasdaq. Even more
interesting is that advancing volume slightly outpaced declining volume in the
Nasdaq yesterday, indicating positive breadth. Therefore, we are seeing
conflicting signals from our analysis in the broad market’s volume. Continue
watching volume closely for signs of the market’s next move. Also, let’s take a
look at the daily charts of each of the major broad-based ETFs. We’ll begin by
taking a look at QQQ (Nasdaq 100 Index):

Notice on the chart above that QQQ closed yesterday exactly at the
previous day’s low, but is still sitting above its primary daily uptrend line
from the low of March. Obviously, this trendline is a key support level that has
been in place for over three months. Until it proves otherwise, we need to
assume the trendline (which is also a 50% Fibonacci retracement from the May 20
lows) will continue to act as support for QQQ. However, a solid break below
yesterday’s low (more than a few pennies) would confirm the break of trendline
support. If that happens, look for the 50-day moving average (the green line) to
act as the next support level, which could also become the new anchor point for
a more gradual uptrend line. If the current trendline holds, the 20-day moving
average (orange line) and yesterday’s high will both act as the next key
resistance levels. Next we will take a look at DIA (Dow Jones Industrials):

Just like QQQ, the Dow (and DIA) is still sitting above its daily
uptrend line from the March low. One difference, however, is that DIA closed
yesterday well below the lows of the current week. As such, resistance will now
be found in the 90.50 area of DIA, the area of the lows from June 23 and 24.
Above 90.50, the 20-day moving average will also provide resistance around 91.
The proverbial “line in the sand” appears to be at 9000 in the Dow (just above
90 in DIA). If yesterday’s lows are convincingly broken in DIA, we will again
look for the 50-day moving average to provide the next price support around 88.
Finally, let’s look at SPY (S&P 500):

As you can see, SPY is the only one of the three major indices that has
already broken below support of its primary uptrend line. However, before you
get too excited about shorting, we recommend waiting for confirmation that the
trendline has been broken because the trendline was not broken until the final
few minutes of trading yesterday. We have seen many cases where the index
immediately bounces back above the trendline the next day, leaving only a probe
below the support level. Confirmation would occur if SPY trades below
yesterday’s low after the first thirty minutes of trading today. As you can
probably guess by now, the 50-day moving average will act as the next primary
support level, just over $95. Resistance will be found all the way up to and
including the 20-day moving average.

Based on the daily charts above,
you can see that today is likely to be “judgement day” for the broad market
because today’s outcome is likely to determine the direction of the trend for
the next several weeks. Yesterday’s selloff leaves the major indices in a
precarious position, either sitting just above or below their daily trendline
support levels that have been in place since the rally began on March 12. If the
major indices trade below yesterday’s lows, it will trigger a technical sell
signal due to the break of daily trendline support. However, the lows of
yesterday could equally act as support to launch the market much higher because
the broad market has not yet confirmed the break of support. Furthermore, the
real reaction to a Fed announcement often does not take place until the
following day. Therefore, we feel caution is definitely in order today on both
sides of the market. If you are long, use very tight stops in case the trendline
support is broken today. If you are short, equally tight stops are required in
the event the trendline acts as a launching pad. If you are cash, that’s
probably a wise move so that you can be nimble and ready to take advantage of
the market’s next major move. Don’t fall in love with either side of the market
today and remember to TRADE WHAT YOU SEE, NOT WHAT YOU THINK!


Today’s watch list:

Since most
sectors and indices are at such a critical point right now, we want to see which
way the broad market heads from here before posting any new trade ideas. We need
to be careful that we don’t get stuck on the wrong side of the market becuase
when a breakdown or breakout comes at this critical juncture, it could happen
quickly. Since we have several conflicting signals, we need to wait for
confirmation before taking new positions. We will, however, e-mail you an alert
with any new “swing trades” we enter today.


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 long (1/2 position from June 25) –
    bought 29.89, sold 31.06, net
    points = + 0.17, net P/L = + $28

Open Positions:

    WMH long (from June 24) –
    bought 39.40, stop at 38.20, target at 41.70,
    unrealized points = (0.10), unrealized P/L = ($11)

Notes:

No changes to the WMH stop yet.

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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