The Wagner Daily | September 30, 2003

Commentary:

After three consecutive days of heavy selling, the major indices corrected by price yesterday, each closing above last Friday’s highs. Just as QQQ (Nasdaq 100 Index) dropped the highest percentage of the three major broad-based ETFs last week, it bounced the highest percentage yesterday, recovering 1.7%. SPY (S&P 500 Index) gained 1.0% yesterday, while DIA (Dow Jones Industrial Average) closed only 0.7% higher. While it was positive for the bulls to see broad-based gains after last week’s sharp selloff, yesterday’s total market volume was lighter than any of the three big down days last week. This means that the bounce was more the result of the sellers taking a break rather than the buyers rushing back into the market. In order for yesterday’s gains to be convincing, you ideally would have needed to see an increase in volume that was higher than the previous day of selling, which would have indicated that institutions were supporting the rally. However, since this did not happen, we remain cautious about entering new long positions and feel that being on the short side of the market offers a better risk/reward ratio. By this we mean that even if the market bounces higher today, there is such an abundance of overhead resistance from last week’s selloff that any gains are likely to be minimal. On the other hand, if selling momentum once again kicks in, you could reap larger profits and have less risk than if you attempt to buy this small bounce.

Because of yesterday’s opening gap up, it was difficult to determine a low-risk entry price for any new long positions, which is why we did not list any new plays yesterday. However, when an index gaps up after three days of selling and then drifts lower in the morning to test its lows of the prior day, this often provides a low-risk entry point on the long side because double bottoms are often formed in this manner. We profited from this type of trade in the ETF Real-Time Room yesterday by waiting for the opening gap in SPY to drift lower and test the previous day’s low. At that point, we bought the selloff into support and put a stop just below the prior day’s low. As it turned out, we caught the exact bottom yesterday and realized an approximate gain of 70 cents on SPY long by subsequently selling into resistance after it reversed. The 15-minute chart below illustrates where we bought and sold SPY yesterday:

While the type of intraday trade shown above is probably not suited for many of the “swing traders” who read this newsletter, I feel it is important for all traders and investors to understand how the previous day’s lows and highs will always act as support and resistance levels the next day, especially when a gap fails. By understanding this, you can often take advantage of buying double bottoms and shorting double tops, both with very low risk. If you’re wrong and the double bottom or double top does not hold, your losses are minimal because your stop is set just below support or above resistance. However, you stand to gain large profits if you are correct, which we were yesterday. This is why we say this type of trade offers a positive risk/reward ratio.

Yesterday’s broad-market bounce caused SPY and DIA to both once again close above their 50-day moving averages, which were broken last Friday. QQQ, which never broke its 50-day MA, once again bounced off it yesterday. Since each of the three major indices closed above their 50-day moving averages, the prices of these moving averages are likely to act as levels of support today. The 50-day moving averages for each of the major broad-based ETFs are as follows: SPY 100.63, DIA 93.76, QQQ 32.49. Consider writing these levels down and watching them carefully. As long as the indices hold above these levels, caution is warranted on the short side. Also watch the 1000 level on the S&P futures, which happens to converge with the 40-MA/15 min. Just as the 1000 level acted as resistance yesterday morning, it is likely to provide support today.

On the upside, resistance can be found by drawing Fibonacci retracement lines from yesterday’s lows up to the highs of last week. In doing so, you will see that, although the indices recovered yesterday, they have not yet even bounced up to their 38.2% retracement levels. The 38.2% Fibonacci retracement levels are: SPY 101.12, DIA 94.20, QQQ 33.25. These are the levels at which the major ETFs are likely to have trouble going much higher. You may want to write these levels down as potential prices to initiate new short positions in the event the market rallies a bit more today. Beyond the 38.2% retracement levels, the 50% retracements would provide even more resistance. But, then again, there may not be enough buying volume to push the indices that high.

Remember that today is the last day of the month and the third quarter. The last few days of a month, and especially a quarter, are often marked by sporadic price action due to the “window dressing” in which mutual funds adjust their portfolios in order to make their current positions appear more positive. Some of yesterday’s rally may have been attributed to this and we may see the same thing occur today. However, I caution you against putting too much value into expecting the market to rally just because of “window dressing.” The reality is that most of the institutions who wanted into a particular stock or index have already done so. Nevertheless, this is just something to keep in mind as we enter today’s session. Also, Consumer Confidence and Chicago PMI economic reports are both due out at 10 am EST today. Expect these reports to have an effect on the market’s bias today as well.

Today’s watch list:

BBH – Biotech HOLDR
Long

Trigger = HALF POSITION ONLY above 130.20 (above yesterday’s high)
Target = 133.00 (resistance of 50-day MA)
Stop = 128.55 (below yesterday afternoon’s low)

Notes = BBH formed a perfect bullish “hammer” candlestick pattern yesterday, meaning that the entry point is above yesterday’s high, with a target of the 50-day moving average. However, because the overall bias of the market is weak right now, we will only enter HALF position size if this trade triggers. Based on the MTG Position Sizing Model, that equates to 50 shares, since a full position of BBH is 100 shares (half of SPY). New subscribers are encouraged to study the model and apply it to their own trading accounts because proper position size management is a key to success.

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

Trigger = HALF position below the 20-minute low, HALF position below 92.98 (below three-day low)
Target = 91.70 (support of 23.6% retracement from March low to September high)
Stop = 94.20 (above yesterday’s high)

Notes = We will only short DIA once it breaks below its low of the first twenty minutes of trading. If that does not happen, we will not short it. HALF position will be shorted on the break of the 20-minute low and second half will only be shorted on a break of 92.98. Will trail the stop lower as we are able and will email and updates.

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 = + $116

HHH short (1/2 position from Sept. 26) –
shorted 42.99, covered 43.50, points = (0.51), net P/L = ($54)

Open Positions:

unrealized P/L = + $1

Notes:

We covered RTH short incrementally yesterday when it hit our trailing stops, netting us more than a point of gain. We were stopped out of the HHH short (1/2 position), but immediately re-shorted it upon realizing there was resistance of the hourly downtrend line just overhead. As such, you will see the HHH position we closed for a small loss above, as well as a re-entry listed under “open positions.”

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