The Wagner Daily | September 23, 2003

Commentary:

As
expected, the major indices reversed and closed lower yesterday, each giving
back most or all of last week’s gains in a single day. The S&P 500 Index,
the Dow Jones, and the Nasdaq Composite each closed between 1.1% to 1.6% below
last Friday’s closing prices. While the Nasdaq surrendered more than half of
last week’s gains, the Dow Jones and S&P 500 both gave back nearly all of
last week’s gains. However, despite the significantly lower closing prices,
nearly all the losses were the result of an opening gap down and the subsequent
first thirty minutes of trading. From that point through the rest of the day,
the major indices corrected by time and traded in a narrow, relatively sideways
range. The major indices briefly broke to new intraday lows around 2:30 pm EST,
but recovered back into the range during the final hour. Confirming the
weakness, declining volume outpaced advancing volume by a margin of
approximately 4 to 1 in both the NYSE and Nasdaq. But, total market volume in
the NYSE was 15% lighter than the previous day and was 9% lighter in the Nasdaq.
This tells us that, even though the sellers clearly dominated the market
yesterday, institutions were not rushing for the exit doors.

The fact
that most of yesterday’s losses were the result of the opening gap down and
first thirty minutes of trading made it challenging to profit from trading on an
intraday basis. In order to easily profit from yesterday’s weakness, you
basically had to be short from overnight. Although last Friday’s trading action
was relatively weak, the S&P’s closing price above the 1030 support level,
along with Friday’s light volume, did not equate to a positive risk/reward ratio
to be heavily short over the weekend. Large opening gaps are great when you are
positioned in the direction of the gap, but they often make it difficult to
profit on an intraday basis if you were flat coming into the day.

If you
look at the daily charts of the major indices, you will see that the Dow Jones,
S&P 500, and Nasdaq 100 each tested support of their 20-day moving averages
yesterday. I found this very interesting because it was only last week that each
of the major indices bounced off support of their 20-day moving averages for
several consecutive days before eventually breaking out to new 52-week highs.
But, it is only a few days later and the major indices are once again testing
support of their 20-day moving averages. After breaking out to new 52-week highs
last week, a strong market should have continued to reach new highs in the
following days. Instead, the breakout lasted only one day and the major indices
dropped back down to test their 20-day moving averages only two days later. What
does this all mean? This means that the distance and length of time between
subsequent tests of support (the 20-day moving averages) is becoming more
narrow. As such, odds are increased that the 20-day moving averages will soon be
broken, especially with the overhead resistance that was created with
yesterday’s gap down.

While yesterday’s action was bearish, the overall
public sentiment of the market remains relatively bullish. This means we could
easily see a rally attempt to recover yesterday’s losses. If the market does
rally, remember where your key resistance levels will be. The first area of
resistance will be yesterday’s intraday highs because the gap usually acts as
resistance. Yesterday’s highs in the major broad-based ETFs were as follows: SPY
102.96, DIA 95.85, and QQQ 34.20. If the market has enough momentum to break
yesterday’s highs, expect Friday’s lows to be even more significant resistance
because prior support acts as new resistance once support is broken. Friday’s
lows were as follows: SPY 103.40, DIA 96.21, QQQ 34.36. I recommend you write
all of the above prices down and keep them in front of your workstation so that
you are ready to take advantage of potential trading opportunities. If the broad
market rallies to near Friday’s lows, we feel this bounce presents a low-risk
opportunity to sell short the major indices due to a positive risk/reward ratio.
By setting your stop just above Friday’s HIGHS, you are only risking a small
loss if you are wrong. But, if you are correct and the market heads back down
after running into resistance, you will be short at an excellent price that will
provide you with large potential profits.

While we talked about
resistance levels and potential places to sell short, you also need to be aware
that yesterday’s lows are likely to act as very strong support levels due to the
convergence with the 20-day moving averages AND support of the primary uptrend
lines on daily charts on each of the major indices. I have annotated this
uptrend line on daily charts of SPY, DIA, and QQQ below. Notice how the uptrend
line is converging with the 20-day moving averages:

As you can clearly see, yesterday’s lows are a key support level that
you need to watch closely. If yesterday’s lows are broken within the next
several days, it seems to be a “no-brainer” to short the broad market. However,
aggressive shorting is risky unless those lows are broken. Either way, we expect
trading to be tricky on both the long and short side of the market unless the
break of yesterday’s lows occurs. Don’t forget that we are entering a
historically weak time of year for the broad market and that would give the
market a perfect excuse for a technical correction and price retracement. But,
all trend lines remain intact as of this moment. The bottom line is that caution
is once again required on both sides of the market. The bulls can rightfully
argue that the primary uptrend lines and support of the 20-day moving averages
are both still intact. The bears can argue that last week’s breakout above the
multi-month consolidation failed and the market is already testing the 20-day
moving averages again. When both sides of the camp have equally strong
arguments, that spells caution for the astute and conservative trader.

Today’s watch list:

DIA – DIAMONDS (Dow Jones Industrial Average Index Tracking
Stock)
Short

Trigger = below the 30-minute low (any price below
low of first thirty minutes)
Target = 94.20 (support of prior low from Sept.
15)
Stop = 96.50 (above hourly downtrend from high of Sept. 18)

Notes = We are using a slightly different type of entry price in DIA
because we want to maximize our risk/reward ratio. We simply will short DIA only
IF it trades below the low of the first thirty minutes. If it never trades below
the low of its first thirty minutes, we will not short it. If it does so later
in the day, we will short at that time. To assist you, we will e-mail you an
intraday update informing you of our entry time when/if it triggers.

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 = ($144)

Open Positions:

unrealized P/L = ($23)

Notes:

We
were stopped out in TLT due to an opening gap down. Despite a good buy setup on
a break of the 50-day MA, the bonds did not follow through due to U.S.
instrument weakness across the board yesterday. We also shorted MDY when it
triggered yesterday, based on the MTG Opening
Gap Rules, and are using the same stop for now. Will e-mail you any updates
on new stop for MDY.

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