The Wagner Daily | September 3, 2003

Commentary:

As expected, institutional volume returned to the markets yesterday, confirmed by the impressive surge in volume. Volume in the NYSE was 52% higher than the previous day, while Nasdaq’s volume was nearly 49% higher. This was the heaviest volume day in nearly one month and it put the total market volume back above its 50-day average in both the NYSE and Nasdaq. The sharp and sudden increase in volume made it clear that the “big money” has returned from their summer holidays, which is exactly what we have been waiting for.

Not only did the “big money” return to the markets, but they returned in buying mode. Although the bears briefly took control during the first hour of trading, the selling was short-lived and the broad market quickly recovered and eventually broke to new intraday highs during the late afternoon. The turning point that caused the S&P 500 to stop selling off and head higher was the trend line that had been established during the past several days. Interestingly, the 20-period moving average on the 15-minute chart also converged with this trend line and the convergence formed the support. The 15-minute chart of SPY (S&P 500 Index) below illustrates this:

Although each of the major indices closed sharply higher yesterday, a definite shift in sector rotation could be seen. The Semiconductor Index (SOX) and the Nasdaq Composite (COMPX), both of which led the broad market higher last week, actually showed the most relative weakness yesterday. While the S&P and Dow set new highs, the Nasdaq and Semis traded sideways in the middle of their intraday range. The Nasdaq eventually picked up some steam during the final hour, but it still remained weak relative to the S&P and Dow. This, however, should not have been surprising given how strong the Nasdaq has been lately. Institutional money has a tendency to flow into a particular sector for several days at a time before moving to another sector that has often been forgotten about. In this case, money flowed out of the Semis and into sectors such as Pharmaceutical, Biotechnology, and Utilities, each of which were quite strong. Quite often, sectors follow the same pattern of inverse relationships, one of them being an inverse relationship between the Drug stocks and the Semis, which is what occurred yesterday. Since we had been anticipating rotation back into the Drug stocks for the past week, we were well positioned with our long position in PPH, which actually surpassed its initial profit target yesterday, leaving us with an unrealized gain of about two points. UTH (Utilities), which we have been stalking, also triggered yesterday and took off sharply, leaving us with one point in unrealized profit, based on the closing price. We also attempted to short the weak sectors of SMH and QQQ intraday yesterday, but that did not work out and we quickly took small losses.

As you probably noticed, there many new 52-week highs set yesterday! The Dow broke its prior high of 9500 and closed at a new 52-week high, the S&P 500 Index broke above the multi-month consolidation pattern and closed at a new high, and the Nasdaq once again set a new high. Without a doubt, it was a bullish day and the increase in volume confirmed the bullish action. Most impressive was the fact that the S&P had enough momentum to break its pattern of lower highs and actually close at a new 52-week high. The weekly chart of SPY below illustrates the breakout after months of consolidation:

Because each of the major indices closed at new 52-week highs yesterday, there is no significant technical price resistance overhead. When the last price resistance of an index is from more than one year ago, it rarely acts as major resistance because anybody who wanted out of the trade has already done so. That is why indexes and stocks that reach new 52-week highs typically go much higher; there is simply no overhead price resistance. While the natural human tendency is to avoid buying a stock or index that is trading at a new high, the reality is that new highs are the best buys you can make because they usually go much higher. This, of course, is only true if a corresponding increase in volume confirms the break out (as it did yesterday). So, this leaves us with the very distinct possibility that the major indices, virtually all of them in sync, will make another leg higher from here.

Before you back up the truck, mortgage your house, and sell all your belongings to buy the market today, bear in mind that yesterday was the sixth consecutive day of gains for the broad market. Does this mean the market will definitely correct today? Of course not! If the momentum is strong enough, it could keep running right along to new highs once again. But, I would be very careful entering any NEW long positions after six consecutive up days. If you do enter new positions, use tight stops because you can always buy back in at a better price if we see a correction. Ideally, it would be great to enter new long positions on a retracement back to the break out point in the S&P because the prior resistance will be the new support. If, on the other hand, you are already long, that’s great! Simply continue to trail stops higher (as we are doing with PPH and UTH) until the correction comes.

Today’s watch list:

(There are no new plays for today. Instead, we will focus on micro-managing our open positions and will e-mail you if we change the stops or take profits.)

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:

unrealized P/L =
+ $180

UTH long (from Sept. 2) –
bought 70.77, new stop at 70.75, target of 72.95, unrealized points = + 1.00, unrealized P/L =
+ $100

Notes:

PPH rallied up to and surpassed our initial price target of 75.05 yesterday, giving us an unrealized gain of nearly two points. Therefore, we have raised the stop to 74.90. We are now keeping a tight trailing stop, which will protect the profits, but will also allow the possibility of additional gains. Also, UTH triggered yesterday and rallied sharply, leaving us with an unrealized gain of one point based on the closing price. Notice we have trailed a stop to breakeven, thereby removing the risk from the trade. We are still looking for about one more point of profit from UTH. Obviously, the IWM short did not hit our trigger price yesterday, which prevented potential losses in that position.

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