The Wagner Daily | October 3, 2003

Commentary:

The broad market spent most of yesterday oscillating in a narrow range, consolidating near the previous day’s high. It was choppy, but the major indices eventually each closed about 0.2% higher. Although prices closed higher, volume once again declined. The NYSE volume was 15% lower than the previous day and the Nasdaq volume came in 12% lower. Advancing volume outpaced declining volume by a margin of 1.93 to 1 in the NYSE, which was positive, but much lower than the 6 to 1 ratio the previous day. Breadth was nearly flat in the Nasdaq, which once again showed relative weakness to the S&P and Dow.
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). In summary, yesterday was a tug-of-war between the bulls and bears that caused a false intraday breakdown, as well as an intraday double top during the final hour of trading.

Both SPY (S&P 500 Index) and DIA (Dow Jones Industrials) closed above resistance of their 20-day moving averages yesterday. Considering that volume was relatively light, this was a bit impressive. Consider that the recent high-volume selloff caused the major indices to break below both their 20 AND 50-day moving averages just a few days ago, but now the S&P and Dow are back above their 20-day moving averages. The Nasdaq, on the other hand, continues to lag and is still below its 20-day moving average.

While the break above the 20-day moving averages is positive for the S&P and Dow, both of these indices failed to close above resistance of their 61.8% Fibonacci retracements (see yesterday’s newsletter for explanation and charts). Technical analysts, including myself, will be closely watching this level during the next several days. If an index that is in a downtrend retraces more than 61.8% of its downward move, the downtrend often reverses altogether. However, if this resistance level holds, it typically marks the top of the bounce before the index begins heading back down. For now, this resistance level is still intact. Furthermore, many of the major indices and market sectors are now forming bearish head and shoulders patterns on their daily charts (click here for an explanation of this pattern). Below is a chart of DIA (Dow Jones Industrials) that illustrates the current head and shoulders pattern. I have removed the moving averages so you can more clearly see the pattern:

As you can see, the Dow is currently forming the right shoulder of the head and shoulders pattern. Even though the right shoulder is a bit higher than the left shoulder, the pattern is still intact UNLESS the Dow rallies above the top of the head, which is the high of September 18. If that occurs, we will have a “failed head and shoulders pattern,” which is extremely bullish and forces the traders who shorted the head and shoulders pattern to cover their positions. However, if the head is not broken and the Dow heads back down and breaks the neckline, the predicted move is equal to the distance from the top of the head down to the neckline. Since the head is approximately at 97 and the neckline is around 93, that equates to a predicted drop of 4 points below the neckline (97 minus 93). Other major indices, such as the S&P 500, are forming a head and shoulders pattern on their daily charts as well.

The formation of the right shoulder of the head and shoulders pattern, as well as overhead resistance of the 61.8% Fibonacci retracement level, is the reason we shorted both SPY and DIA yesterday for multi-day “swing” plays. There is, of course, the possibility that we are a bit early on the short entry and may be stopped out. Sometimes an index will rally above the left shoulder, stop out the shorts, then roll back over down to the neckline. If that happens, it’s not a big deal; we will simply wait to see if the right shoulder starts to roll over and re-short these ETFs upon getting confirmation of the follow-through. Often, the most profitable trades are the re-entries because our timing has been confirmed at that point.

All eye will be focused on the unemployment data that is due at 8:30 am EST today. There has been much chatter about the jobless rate lately and we feel this report will have an impact on the tone of today’s trading session. Expectation for the unemployment rate is 6.2% and non-farm payrolls are expected to be at (317,000). There is also an ISM report due at 10 am EST, but the unemployment data is likely to be more of a market mover.

If you have not done so, check out our message board thread on the EliteTrader web site. We post educational ETF commentary several times per week and all of subscribers are encouraged to post any questions or comments on the board as well. Registration is free and you can view the thread directly by clicking here. Intraday traders may be interested in checking out our new post about the ONEQ ETF, which we traded in the ETF Real-Time Room yesterday.

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:

(none)

Open Positions:

unrealized P/L = ($88)

SPY short (from October 2) –
shorted 101.88, stop 10 cents over 20-minute high, unrealized points = (0.57), unrealized P/L = ($114)

Notes:

Notice how we are using a stop loss over the 20-minute high. So, we will mark the high prices after twenty minutes of trading today and will then set new stop 10 cents over those prices. For those who cannot watch the morning trading, we will e-mail and update with the new stop prices after the first twenty minutes.

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