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The Wagner Daily


Commentary:

After consolidating at the lows of a minor price correction that began in mid-June, the major indices reversed on July 1, after bouncing off of Fibonacci support and briefly probing below support of the primary uptrend line that began on March 12. The broad market neatly followed through to the upside on July 2, causing both the S&P and Dow to recover to trade back above their 20-day moving averages (Nasdaq was already there). On July 3, each of the major indices closed last week more than one percent lower than the previous day, but it’s a good idea not to read too much into it. Since Thursday was a holiday-shortened session that closed three hours early, volume was obviously much lower than the previous day. However, even when proportionately compared to the same time interval of the previous day, volume was still lighter. Interestingly, each of the major indices closed just above the lows of the previous day (July 2), which basically equated to a 38.2% Fibonacci retracement from the lows of July 1 to the highs of July 2. Overall, we interpreted Thursday’s price retracement merely as a correction to compensate for the steep rally of the prior two days. Below is a 15-minute chart of the S&P futures, annotated with the Fibonacci retracement levels from last week’s rally:

On the chart above, notice the candlestick with the long wick that dropped down to a price of 976. Believe it or not, this drop really occurred on Thursday and was not simply the result of a “bad tick.” Reuters reported that the sudden and extremely sharp drop was the result of an errant order from a firm that attempted to sell 100 mini-Dow contracts on the CBOE, but accidentally entered an order for 10,000 contracts instead. Oops! Don’t you just hate it when that happens? Fortunately, the broad market recovered and stabilized after that wacky price movement, but it really confused a lot of traders, yours truly included.

Based on last week’s reversal, is likely that the lows of July 1 will act as short-term support that will enable the major indices to rally and test resistance of their mid-June highs over the next one to two weeks. As the broad market approaches its mid-June highs, which are also the 52-week highs, we will be closely analyzing volume to determine whether there is enough momentum to punch through to new highs. We also will be on the lookout for any signs of institutional selling (distribution), which would be marked by increasing volume on a day when the market closes lower.

In the short-term of the next several days, watch for a break of the highs of July 2 and 3. If the major indices are able to clear resistance of the two-day highs, we will be positioning ourselves on the long side of the market at least until the mid-June highs are tested. However, if the market remains within last week’s range, it could become choppy and range bound, so consider using caution trading the broad market unless last week’s highs are broken. But, if all goes as planned, the goal will be to net several points of profit from both SPY and DIA. Most likely, we will buy the break of last week’s highs and sell into resistance of the mid-June highs. At that time, we would re-assess to determine whether or not we want to re-enter long positions based on the market internals.

This week kicks off quarterly corporate earnings season, although there are many more reports due next week. Big names reporting this week include Alcoa (AA) on Tuesday morning, Yahoo! (YHOO) on Wednesday evening, and General Electric (GE) before the open on Friday. While it is likely that these and other companies will “meet or beet expectations,” the most important factor will be how the market reacts to the reports. Does the Nasdaq rally sharply even if Yahoo! barely meets consensus estimates? Does the Dow sell off even if GE blows away estimates? These are the types of questions you want to be asking yourself because how the market reacts will tell you a lot about the current sentiment, which in turn will help ensure you are trading on the correct side of the market as we move further into the month. Remember that it is not the actual earnings reports that matter, but the market’s reaction to the reports!


Today’s watch list:


SPY – SPYDERS (S&P 500 Index Tracking Stock)
Long

Trigger = above 99.88 (above last week’s high)
Target = 102.10 (just below mid-June high)
Stop = 98.70 (below July 3 close; will trail higher)

Notes = See commentary above for explanation of trade setup. Basically looking to buy a break of last week’s high with a price target of the mid-June high. Since the futures are gapping up sharply this morning, remember to also use the MTG Opening Gap Rules. This basically means we will wait for a break of the 20-minute opening high before buying SPY if it gaps up above its trigger price of 99.88.



WMH – Wireless HOLDR
Long

Trigger = above 40.50 (above high of June 19)
Target = 42.60 (just below prior high of December 2, 2002)
Stop = 39.60 (below July 3 low)

Notes = Based on its relative strength, we had the right idea to swing trade the Wireless sector long last week. But, we were stopped out on July 1 when WMH broke support of 39.00, then quickly recovered. The sector still looks good and has been consolidating, building a base around 40, for the past several weeks. We are looking to buy a breakout of the June 19 high if WMH trades above 40.50.

Remember to use $IWH.X, which is the index for WMH, in order to track the price movement of WMH because it more accurately shows the fair value of WMH. Also, since the futures are gapping up sharply this morning, remember to also use the MTG Opening Gap Rules. This basically means we will wait for a break of the 20-minute opening high before buying WMH if it gaps up above its trigger price of 40.50.


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:

    (none)

Open Positions:

    EWJ long (from June 30) –
    bought 7.30, new stop at 7.30 (breakeven), target at 8.95, unrealized points = + 0.45, unrealized P/L = + $348

Notes:

We did not enter any new Wagner Daily trades on July 3. Our only position coming into this week is EWJ long. We will continue to trail a stop on EWJ as it becomes more “in the money.”

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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