Commentary:

After a small opening gap up, the major indices dropped slightly and began trading within the previous day’s consolidation, but that did not last long. A sharp wave of selling hit the market thirty minutes into the day and caused the S&P, Dow, and Nasdaq to each drop appoximately one percent within about twenty minutes. This drop caused both SPY (S&P 500 Index) and DIA (Dow Jones Industrials) to break below their respective lows of the previous day, but QQQ (Nasdaq 100 Index) once again showed relative strength and held above the previous day’s low. Because the drop occurred after the first reversal period, which begins around 9:50 am EST each day, it was statistically likely that the market’s bias would remain weak for the remainder of the day. However, the weakness was short-lived and each of the major indices slowly grinded their way back up to the previous day’s range, just below their morning highs. Finally, buyers stepped in during the final thirty minutes of trading, creating a small volume surge that pushed the major indices to new intraday highs and above their highs of the previous day.

Yesterday’s market action was challenging to trade on an intraday basis because the initial selloff that occurred after the reversal period did not follow through to lower prices, despite the fact that support of the previous day’s lows were broken in both the S&P and Dow. This made it difficult to profit on the short side of the market. Conversely, there were not any clear, low-risk entry points to buy the broad market due to overhead price resistance of the previous day’s range. The only clear buy setup would have been to buy the breakout to new highs that occurred during the final thirty minutes; but, then again, with volume still coming in lower than average, the probability of follow-through to the upside came down to the toss of a coin. Volume came in about 8% higher than the previous day, but is still below its 50-day average, which is the benchmark level we monitor for signs of institutional interest.

When scanning charts after the close yesterday, I noticed that a few of the major indices are now at key tests of “psychological” resistance points. Compared to “technical” resistance, which is based on trend lines or moving averages, “psychological” resistance is usually formed at large, round whole numbers that many individual traders and the media focus their attention on. These numbers generally do not have any significance on a technical basis, but they eventually do form technical support or resistance levels because people assume they are. In other words, psychological support or resistance levels act as a self-fulfilling prophecy to form technical support or resistance levels. As a clear example, every 500 point increment in the Dow Jones Industrial Average tends to act as psychological support or resistance. The high of the Dow last week and also the year was 9499.90, only a tenth of a point below the 9500 level. Prior to that, you will also notice that the Dow found support exactly at the 9000 level on several occasions in July. The daily chart of the Dow below illustrates these levels:

Is it just coincidence that the Dow found support exactly at 9000 and resistance exactly at 9500? No, it is just the power of psychological support and resistance levels. The placement of sell orders at 9500 and buy orders at 9000 is what has caused these large round numbers to act as support or resistance. Why 9000 and 9500? Because investors who don’t know any better and institutions who are not sharp enough to do solid technical analysis simply take the easy way out and use the big whole numbers as placement for stop orders. As such, these psychological levels eventually become technical levels to watch.

As you saw, 9400 is likely to act as resistance for the Dow today. If it gets through that, 9500 is even more significant resistance. Aside from the Dow, the Nasdaq Composite (COMPX) also closed at a pivotal psychological level of 1800. Take a look:

Finally, 1000 has been a key psychological support/resistance level on the S&P 500 Index:

Obviously, watch these key levels mentioned above to act as “pivot points” on both the major indices today. But, remember that today is a Friday before a three-day weekend, which traditionally has meant very light volume. Furthermore, Greenspan will be speaking at 10 a.m. today, which will give traders yet another reason to stay away from the markets. Since the market will be closed on Monday for Labor Day holiday, The Wagner Daily will not be published on Monday, but regular publication will resume on Tuesday, September 2. Enjoy the holiday, be safe, and have fun. Perhaps we can look forward to improving volume when we return next week.

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Today’s watch list:

UTH – Utilities HOLDR
Long

Trigger = above 70.75 (above the daily consolidation)
Target = 72.95 (resistance of the 61.8% Fibo retracement)

Stop = 69.70 (below yesterday’s low)

Notes = We still like the setup and are keeping it on today’s watch list with the same parameters, awaiting a trigger price. Original comments follow. . .

Although it may not break out today, we like the way UTH has been forming a base of consolidation just above its 20-day moving average. If it does finally break out, we expect it to easily run a few points due to the base of support that has been built. Also, if you look at the WEEKLY chart of UTH, you will see that it is poised to break resistance of a multi-year downtrend, meaning we may want to be patient with this play and attempt to trail the profits longer.

Be aware that UTH often has a wide spread and you definitely want to use limit orders when trading it. More importantly, remember you can use its index to more accurately know where to place your limit order based on the fair value of its underlying components. The index for UTH is $XUH.X, which can be charted just like UTH. Because of the wide spreads, we use alarms to alert us of an entry price, rather than a mechanical buy stop order. Also keep in mind that we account for the volatility of UTH by reducing our share size, since it has a multiplier ratio of only 0.5, based on the MTG Position Sizing Model.

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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:

PPH long (from Aug. 26) –
bought 73.27, new stop at 72.90, target of 75.05, unrealized points = + 0.03, unrealized P/L =
+ $3

Notes:

WMH triggered yesterday, but only during the final few minutes of trading. As such, we made a judgement call to pass it by and wait for more confirmation. However, we may buy WMH today, depending on how it acts, and will send an intraday e-mail alert if we do. Also, we are still long PPH from August 26.

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)

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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.

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Yours in success,

Deron M. Wagner