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The Wagner Daily


Commentary:

Although yesterday began with an opening gap up in the major indices, the Nasdaq (QQQ) immediately began showing relative weakness to both the S&P 500 Index (SPY) and the Dow Jones Industrials (DIA). After being unable to break above the previous day’s high, the Nasdaq sold off down to the range of the previous day’s low. However, during that same time, both the S&P and Dow held near their morning highs. This strong divergence initially created choppiness during the late morning session, but the strength in the S&P and Dow won the tug-of-war and both indices broke out to new highs in the early afternoon, pulling the Nasdaq along with them. Because the Nasdaq showed relative weakness the entire day, QQQ did not break out to a new intraday high until nearly two hours after SPY and DIA. The rally was strong because the hourly downtrend lines we discussed in yesterday’s newsletter were broken. This enabled upside momentum to continue throughout the day, setting in motion a steady intraday uptrend in the afternoon that lasted through the close. Our HHH short hit the trailing stop yesterday, locking in a gain of 90 cents on the remaining shares. We also netted nearly a point of profit in DIA long, which was called in the ETF Real-Time Room yesterday morning. The partial long position in BBH was stopped out due to yesterday morning’s weakness in the Nasdaq. Unfortunately, this happened only a few minutes before the Nasdaq reversed and began to rally, but that’s trading for you! The goal is never to win on EVERY trade, but rather to cut the losers when the stop is hit and let the winners ride as long as possible through the use of trailing stops. If you can do those two things, you will have a pretty good chance of long-term profitability as a trader, even if you are wrong a large percentage of the time.

Despite the 2% gains in each of the major indices yesterday, volume was once again lower than the previous day, which was marked by bearish distribution. Volume was 0.9% lower in the NYSE and 2.7% lower in the Nasdaq. While these differences are not a big deal, a strong increase in volume over the previous day would have been more convincing that yesterday’s rally was more than just a technical correction. Yesterday’s rally marked the second time in three days that volume decreased while prices closed higher. You would expect to see a surge in volume on a day when the major indices each closed several percent higher, but it did not happen. Even though the rally was impressive, the pattern of lighter volume on the up days and heavier volume on the down days is still intact. “In the past six trading days the market has sold off twice in heavier volume, declined twice in lower volume and rebounded twice in weak volume,” said Investors Business Daily. Until this pattern changes, we remain leary of becoming too bullish in the short-term, although our intermediate-term outlook remains mildly bullish.

Looking at the daily charts, yesterday’s rally caused each of the major indices to close at major Fibonacci resistance levels, as measured from the low of September 30 to the high of September 18. Both SPY and DIA closed just above resistance of their 50% retracement levels, while QQQ, which lagged, closed BELOW its 38.2% retracement level. Typically, the 50% level marks the turning point at which an index will reverse in the opposite direction IF the trend is going to continue. Therefore, if SPY and DIA rally beyond their next Fibonacci retracement of 61.8%, odds of profiting from the short side of the market will be greatly diminished. The charts below illustrate how these three ETFs closed at these key levels:

In addition to the resistance from the Fibonacci retracement levels, notice that each of the major indices also have resistance of their 20-day moving averages (the pink lines) overhead. Since the 20-day MA formerly acted as support, expect it to equally provide resistance on the way up. When factoring in the Fibonacci resistance, the overhead resistance of the 20-day moving averages, and yesterday’s unimpressive volume, we feel these three factors provide a low-risk entry point to short the broad market today, with a time frame of 2 – 3 days. It is not likely that the market sells off much today because of yesterday’s rally, but we feel the market will deliberate in this area, probably trading sideways for a day or two, and then attempt to head lower again. If you sell short today, you can simply place your stop above the 61.8% Fibonacci retracement level or above the 20-day moving averages. If you’re wrong and the market goes higher, the loss is minimal. But, if you’re right, you will be short near the top of this bounce into resistance. As for buying the market at current levels, it may work for you, but the risk/reward cannot be justified.

We’ll wrap up today by telling you the exciting news about a brand new ETF that was launched yesterday! The new ETF tracks the 3,357 stocks within the Nasdaq Composite and is traded under the ticker “ONEQ.” Unlike QQQ, which only tracks the Nasdaq 100 Index, ONEQ tracks the entire Nasdaq Composite Index. Unlike all the other ETFs which are traded on the AMEX, this ETF is traded on the Nasdaq exchange. Because of this, we expect ONEQ to be hugely popular and is likely to attract liquidity from former QQQ traders. ETFs continue to become more popular every month and Morpheus Trading Group is proud to remain The Leader in ETF Trading. For more details on the new ONEQ ETF, click here to read an article from the CBS MarketWatch web site. We will be adding this new ETF to the MTG Position Sizing Model and will keep you updated as to our progress with trading the new instrument.


Today’s watch list:

(There are no new plays for today because we anticipate choppy trading action as the market digests yesterday’s rally. If we do enter any new swing trades, we will e-mail an alert.)


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:

    HHH short (1/4 position from Sept. 29) –
    shorted 43.45, covered 42.55, points = + 0.90, net P/L = + $43

    BBH long (1/2 position from Sept. 30) –
    bought 130.25, sold 128.51, points = (1.74), net P/L = ($89)

Open Positions:

    (none)

Notes:

We covered the HHH short yesterday when it hit our trailing stop, netting a gain of 90 cents. BBH was stopped out in the morning due to the Nasdaq weakness. Although we lost 1.74 points, we only had 1/2 position of BBH, which equates to only 50 shares based on the MTG Position Sizing Model. A big key to our consistent profitability has been the proper adjustment of share sizing based on the volatility of each ETF we are trading. If you are new to our services, we strongly encourage you to study the MTG Position Sizing Model and apply the ratios to your own trading account. Whether you have a large or small trading account, the ratios work the same way in determining the proper position sizing for each trade the Morpheus calls.

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

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