The Wagner Daily | July 18, 2003

Commentary:

The recent trend in the broad market may not be in the direction the bulls would prefer, but the major indices sure have been trending lately. Although it is typically rare to have more than one or two trending days in any given week, yesterday was the fourth consecutive trending day in the broad market ever since the downtrend began with the highs of July 14. The hourly chart of SPY (S&P 500 Index) below illustrates how smoothly the broad market has been trending. Notice how SPY has remained within the lower channel (support) and upper channel (resistance) of the downtrend:

Although the major indices all trended down and closed lower yesterday, the one bright spot is that total market volume declined slightly over the previous day, indicating a slight lessening of the selling pressure in both the NYSE and Nasdaq. However, the breadth was negative as declining volume outpaced advancing volume by nearly 4 to 1 in the NYSE and a whopping 10 to 1 in the Nasdaq. Nevertheless, at least we did not see three consecutive days of distribution.

Sector rotation out of the technology sectors and into the “old economy” sectors was also evident yesterday, which often occurs as investors start to become less confident in a bull market. The Nasdaq clearly showed relative weakness while the Dow Jones Industrials showed relative strength the entire day. This, of course, is the opposite scenario of what we have been seeing lately. The Dow closed only 0.5% lower on the day, the S&P 1.2% lower, but the Nasdaq Composite closed nearly 3% lower. Much of the losses within the Nasdaq resulted from a sharp drop in the Russell Small Cap Index, which had been holding the Nasdaq up lately. Yesterday’s divergence in the broad market was so apparent that you could have profited from being long DIA (Dow Jones Industrials) while simultaneously being short QQQ (Nasdaq 100). That’s what the MTG style of relative strength trading is based on; shorting the sectors or indexes with relative weakness or buying those with relative strength.

Going into today, we recommend a bit of caution on the short side. Although the market is not likely to rip higher today, odds are good that the major indices will attempt to reverse or at least bounce today. While anything is possible, it is rare to have more than three consecutive trending days without an attempt to correct in the opposite direction of the trend. As you know, there have actually been four consecutive downtrending days, increasing the odds of a bounce even more. Since there was relative strength in the Dow and weakness in the Nasdaq yesterday, we would expect to see the same type of divergence today as well. However, one very important thing you need to be aware of is that the technical picture of the broad market’s daily charts is starting to look a bit more bearish. Of the three major indices (Dow, S&P, and Nasdaq), the daily chart of the S&P 500 looks the worst because it is the only one of the three that broke below its primary uptrend line yesterday. Take a look at the S&P daily chart below:

The most important things you will note on the chart above are: double top, break of 20-day moving average, and break of uptrend line from low of March 12. However, the very important support level of the 50-day moving average is still below. As long as the S&P holds above the 50-day MA, there is no real danger of the bull market ending yet. If you draw the same trendline for the Dow (from the March 12 lows), you will notice that the Dow closed right on its trendline yesterday, but did not actually close below it like the S&P did. Most importantly, the Dow is still holding the psychologically important 9000 level. Personally, I feel it is low risk to take a long position in DIA (Dow Jones Industrials) near yesterday’s closing price and just keep a stop below 90 (9000 on the Dow). You would be risking less than a point for the potential to make 3 or 4 points if the 50-day moving average holds, right around 9000 on the Dow. If you take a look at a longer-term weekly chart of the Dow (represented by DIA), you will see that the 9000 level (90 on DIA) should provide support:

Despite the selloff in the Nasdaq yesterday, the Nasdaq Composite looks perfectly healthy on the daily and weekly charts. It is the only one of the three major indices that is still trading firmly above its primary uptrend line AND its 20-day moving average, although I would not be surprised to see the Nasdaq correct further, at least down to its trendline. Take a look at a daily chart of the Nasdaq Composite:

The most important thing to keep in mind about today is that it is Options Expiration for the month of July. As you probably know, option expiration days tend to become very erratic and volatile, especially in the afternoon session. As such, you may wish to take it easy with the intraday trades today and look to get a fresh start on Monday. Since Microsoft reported last night, at least we have a bulk of the big earnings reports behind us now.

Today’s watch list:

Because of the erratic nature of options expiration day, there are no new plays for today. We will instead focus on managing our existing two open positions, listed below. Will re-assess the market for new entries on Monday.

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 = + $33

Open Positions:

unrealized P/L = + $7

EWJ long (full position from July 15 – 17) –
bought 7.81 (avg.), new stop at 7.35, unrealized points = (0.30), unrealized P/L = ($251)

Notes:

We bought OIH per yesterday’s Wagner Daily, took profits on half the position later in the day, and took the remaining half position overnight. We also bought the remaining 1/4 position of EWJ as we added on the correction. EWJ is now down to support of its daily uptrend line and should begin to stabilize here. Look for a technical writeup on EWJ 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
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