The Wagner Daily | September 17, 2003

Commentary:

After spending the first half of the day in a holding pattern just above the previous day’s highs, the major indices rallied sharply after the Feds announced their 2:15 pm EST decision to leave interest rates unchanged. Traders apparently interpreted the Feds’ comments as positive after they said they were prepared to leave rates unchanged for quite a while. This sparked a rally that caused the major indices to each break out of the consolidation from the previous four days. The initial relative weakness we spotted in the Nasdaq yesterday vanished quickly as the index led the broad market higher. The Nasdaq Composite closed 2.3% higher, while both the S&P 500 Index and Dow Jones Industrials Average each closed approximately 1.35% higher. Most importantly, a significant increase in yesterday’s trading volume confirmed the rally. Total volume surged approximately 21% higher than the previous day in both the NYSE and Nasdaq. While this volume was still lighter than September 10, in which the market sold off sharply, it was certainly stronger than the volume we have been seeing in previous rally attempts.

It looks like the 20-day moving averages once again provided support for the major indices. The S&P 500, Dow Jones, and Nasdaq are each now firmly above their 20-day MAs again. Yesterday’s broad-based rally caused each of the major indices to close just shy of their prior highs that were set on September 8. To make your job easy, I have annotated the prices of the prior highs on the daily charts of the major broad-based ETFs below. I recommend you set alarms for these prices on your trading software so that you are instantly aware if one of the major indices breaks to a new 52-week high. We’ll begin by looking at SPY (S&P 500 Index):

Next, take a look at QQQ (Nasdaq 100 Index). Note the green trend line I have drawn:

On the chart of QQQ above, notice the green trend line that I have annotated. This trend line was formerly acting as support, but was broken on September 8. Therefore, expect this prior support level to now act as the new resistance. If that happens, it means that QQQ will have a difficult time trading much higher today because the trend line resistance is just overhead. Finally, here is the DIA (Dow Jones) chart:

If the prior highs annotated above are broken, it will result in new 52-week highs once again, which would enable the market to make another leg higher with minimal resistance. However, beware of the possibility of a double top until the highs are broken with conviction. With yesterday’s volume increase and corresponding breakout, our bias has now turned to cautiously positive. Nevertheless, we also have been in this business long enough to know that the market is excellent at doing exactly the opposite of what most people expect, at a time when it will inflict the maximum pain to the maximum number of people.

Despite the mystical optimism being spewed from the financial media, the risk associated with blindly buying the broad market at current levels is simply too high. What needs to happen in order for us to become more bullish? Primarily, we need to see follow-through with increasing volume on the market’s up days and lighter volume on the down days. Like I mentioned in the first paragraph, yesterday’s volume was definitely higher than the past several days, but was still lower than the selling volume of the last major down day. Finally, the month of September is historically a negative month for the stock markets. While there is certainly no guarantee that the past will repeat in the future, it is simply one additional factor that forces us to remain a bit cautious on the long side. Go ahead and test the waters and buy the market as long as the trend remains intact, but be selective. Look for stocks and sectors that are showing the most relative strength on strong volume. Those leaders will be the last to fall, even if the broad market does.

As a side note, a tip of the hat goes to those subscribers who told me they are still long EWJ from our initial call around $7.30. Since it just broke above $9 yesterday, that equates to a 23% gain within six weeks. Not too shabby!

Today’s watch list:

(There are no new plays for 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 = ($53)

Open Positions:

(none)

Notes:

IWM hit our stop when the market broke out of the consolidation yesterday. However, we only were short 1/2 position size, so the capital loss was minimal. The second half of IWM short never triggered, nor did the QQQ short. Although not a Wagner Daily play, we also bought QQQ in the ETF Real-Time Room yesterday, after it broke out, and currently have an unrealized gain on 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