The Wagner Daily | August 7, 2003

Commentary:

Yesterday was clearly a day of divergence between the major indices as
the S&P 500 and Dow Jones Avg. both closed positive on the day, but the
Nasdaq closed lower. This represents a continuation of the shift in sector
rotation we have been seeing over the previous several days. Formerly high
flying sectors such as Biotech, Internet, and most Small Cap stocks in general
have been getting whacked pretty hard over the past several days while former
dogs like the Utility and Oil Service sectors have begun showing signs of life.
In fact, the two strongest sector ETFs yesterday were OIH (Oil Service HOLDR)
and XLE (Energy SPYDER). OIH clearly outpaced the broad market by closing more
than 2% higher on the day. Even the Telecom HOLDR (TTH) was strong yesterday,
closing 1.4% higher. The sector divergence was so broad yesterday that just
about every Nasdaq-related sector closed in the red, while nearly every “old
economy” sector closed flat to higher. It was interesting because intraday
traders were able to profit from being long SPY (S&P 500 Index), but also
short QQQ (Nasdaq 100 Index), which is exactly what we did. Buying the sectors
with relative strength and shorting those with relative weakness is our core
focus each day in the ETF Real-Time
Room.

In addition to the price divergence between the S&P and
Nasdaq, you may have also noticed divergence between the closing prices of the
Nasdaq Composite (COMPX) and QQQ (Nasdaq 100 Index Tracking Stock). Although the
Nasdaq Composite closed 1.2% lower than the previous day, QQQ only closed 0.07%
lower (basically flat). This discrepancy sometimes occurs based on the level of
after-hours activity the previous day. In this case, the previous day’s closing
price of QQQ reflected the after-hours selling that was brought on by Cisco’s
earnings report, whereas the Nasdaq Composite stopped trading right at 4:00 pm
EST. Therefore, the Nasdaq Composite (COMPX) was trading lower as soon as the
market opened yesterday, but QQQ and the Nasdaq 100 futures were trading flat on
the day, which is basically where they both closed. The bottom line is that much
of the Nasdaq Composite’s losses of yesterday were already reflected in the
closing price of QQQ the previous day. Yesterday’s weakness in the Nasdaq also
caused the Nasdaq Composite to finally break below its 50-day moving average.
This means that each and every broad-based index is now trading below its 50-day
MA.

One thing I have not discussed extensively during the past several
weeks is the importance of weekly charts. While most traders focus their
research on daily and intraday charts of the major indices, weekly chart
intervals are much more significant in that they directly dictate the
intermediate trend of the broad market. As you may already know, the longer the
time interval of the chart, the more significant its support and resistance
levels. For example, a trend line on a daily chart will act as greater support
or resistance than a similar trend line on a 15-minute intraday chart. Likewise,
support and resistance levels on a weekly chart are going to be more significant
than support or resistance levels on a daily chart. If you think about it, this
is really quite logical because the longer a time interval you are analyzing,
the less “noise” you will see and the more you will see the “big picture” of
what is really happening aside from the day to day gyrations. This is the same
reason why I do NOT use 3 or 5-minute charts for intraday trading and focus on
15 and 60-minute charts instead. If longer time intervals are more accurate in
predicting trends, why do we not focus exclusively on weekly charts and ignore
shorter time frames? We do not base trade entries on weekly charts simply
because the time interval is too large to effectively select precise entry and
exit points for the relatively short time frames in which we trade (1 – 3 days).
Remember that each bar on a weekly chart represents an entire week’s worth of
data.

Although we do not base exact trade entry prices on weekly charts,
I have learned that paying attention to key trend lines and moving averages on
the weekly charts is crucial because it prevents you from missing the “big
picture” of what is really happening. For example, I am certain you have placed
a trade in which all the technicals looked perfect on the daily chart, but the
trade refused to work as you expected. Chances are that you were probably
overlooking a key support or resistance level that would only be found by
looking at a longer-term chart such as a weekly chart.

I have recently
been talking to fellow traders who want to blindly short the broad market just
because the daily charts look weak and the major indices have broken below their
50-day moving averages. While they are correct that sentiment has recently
become much more bearish and the risk/reward probably favors the short side
right now, I personally am cautious about aggressively shorting the markets here
because the longer-term WEEKLY charts are still quite bullish and have not shown
any bearish warning signs of an impending reversal of the recent bull market. To
put all this in perspective, let’s take a look at both a daily and weekly chart
of SPY (S&P 500 Index). We will begin with a look at the daily chart:

The daily chart above is certainly looking a bit bearish because SPY has
dropped beneath its 50-day moving average for the first time in five months.
Also, the 20-day MA is about to cross down below the 50-day MA, which is another
bearish signal that would signal a change in the short-term trend if that
occurs. Now, let’s take a look at the weekly chart of SPY:

As you can see, SPY looks much more bullish on a weekly chart, doesn’t
it? It is still firmly trading above both its 20 and 50-week moving averages.
SPY also has support from the prior highs that were set in the second half of
2002 (remember that prior resistance becomes the new support). Although the
daily chart looks bearish, there is nothing on the weekly chart that is telling
us to be aggressively short right now. While you could probably get away with
being short SPY down to its 20-week moving average, which is around $95, I would
definitely advise caution on the short side right now because SPY is coming down
to big support on the weekly chart. I would be quite surprised if the 20-week
moving average does not provide a strong bounce for SPY. If you look at the
weekly charts of the other major indices, you will see the same type of support
levels, despite bearish looking daily charts. Hopefully you now understand why I
say it is important to pay attention to the weekly charts. Be cautious out there
and remember to always use stops, regardless of which side of the market you are
on!

Today’s watch list:

XLE – S&P Select Sector Energy SPYDER
Long

Trigger
= above 23.33 (above the 20-day MA and downtrend line)
Target = 24.00
(resistance of 50-day MA)
Stop = 23.05 (below the breakout level)

Notes = As discussed in commentary above, we began seeing sector
rotation back into the energy stocks and we expect follow-through for the next
several days. This ETF is not very volatile, so we are assigning a multiplier
ratio of 3X to XLE (because it is not yet listed on the MTG Position Sizing
Model). If you prefer a more volatile ETF with similar components, check out
UTH (Utilities HOLDR). You should also keep an eye on OIH (Oil Service HOLDR),
which looks like it wants to rally again 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:

net P/L = ($109)

Open Positions:

unrealized P/L = ($320)

Notes:

We shorted RTH per yesterday’s newsletter,
but it rallied sharply and stopped us out. We are still long EWJ also, although
it traded right down to (not through) our stop yesterday.

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