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The Wagner Daily


Commentary:

Yesterday began much like other recent trading sessions: minor selling pressure, extremely narrow range, lack of direction, and lots of chop. Despite very positive earnings reports from JNJ and MER before the open, the stock market initially was not impressed. However, as anticipation of INTC earnings (after the close) approached, the major indices broke out of the range around 2:00 pm EST and began a rally that remained intact through the close. Each of the major indices closed with gains of approximately 0.5% and at new 52-week highs. Unlike previous rallies during the past week, volume increased significantly yesterday. Because the broad market closed with gains AND on higher volume than the previous day, yesterday was technically an “accumulation day.” This typically confirms the presence of institutional buying, which provides a more basis than if the rally occurred on light volume “retail” buying.

The after-hours market initially reacted positively to the earnings report from Intel yesterday after the close. This has carried overnight and the S&P and Nasdaq futures are both poised to open today’s session with a moderate gap to the upside. Because the major indices closed at fresh 52-week highs yesterday, there is not any significant technical price resistance overhead. When this occurs, indexes will often continue to trade higher for several more days even if volume is light. This is simply due to the fact that the presence of sellers is minimal when indexes or stocks are trading at new 52-week highs. However, it is important to be aware that both the S&P 500 and Nasdaq Composite have closed with modest gains in nine out of the last ten days. Therefore, a pullback could easily occur within the next day or two, but the euphoria from yesterday’s positive earnings may be enough to keep the gains going through the rest of the week.

Because the intraday action of the broad market has been quite erratic lately, you may wish to focus your attention on trading the individual sector ETFs with relative strength instead. Semiconductors (SMH) were one of the strongest sector ETFs that led yesterday’s rally. As Intel’s earnings report approached, SMH rallied yesterday afternoon and closed right at a big test of resistance for a new 52-week high. The daily chart of SMH (Semiconductor HOLDR) below illustrates this:

As you can see, the next several days will be “make or break” time for SMH, meaning it will either form a big ol’ double top or will break out to new 52-week highs. If the pre-market gap in Intel holds up, we anticipate the Semiconductor HOLDR to break out to new highs and make another leg higher. You could potentially profit from this by waiting for the first thirty minutes of trading to pass and then buying SMH if it is still trading near its morning high. However, if the gap in SMH fails to hold after the first thirty minutes of trading, you’re probably better off leaving it alone.

Another sector that caught our attention yesterday was Pharmaceuticals. The Pharmaceutical HOLDR (PPH) has been in a downtrend since mid-June. However, there are technical signs that the sector may be due for a reversal. Take a look at the daily chart of PPH below:

Notice that PPH formed a “higher low” at $74, after its last major bounce ended in mid-September. Then, after a minor bounce in the beginning of October, PPH came back down a few days ago and formed a double bottom at the $74 support level. On the heels of strong earnings from JNJ yesterday morning, PPH showed relative strength to the broad market and closed above the high of the previous day. Yesterday’s price action formed a bullish engulfing candlestick and we anticipate more follow-through to the upside. Relative to the broad marekt, the sector has been quite weak during the past five months. However, due to sector rotation, we feel that institutional money flow will begin rotating back into the pharmaceutical stocks. There is resistance of both the 20 and 50-day moving averages overhead, but we plan on buying PPH on a break of this resistance around 75.25.

By the way, if you have not studied the underlying components of the various sector HOLDRS recently (such as SMH and PPH), you may wish to visit www.holdrs.com to view the list of stocks that comprise each sector ETF, as well as their percentage weightings. Doing so enables you to more accurately predict the price movement of the ETF by following the price action of the leading stocks that comprise it.

As always, the best way to minimize your risk with trading today’s opening gap is to wait until the market enters the first reversal period from 9:50 – 10:10 am. If the gap remains intact after this time, go ahead and take some long positions in the sectors or indexes that are showing the most relative strength to the broad market. But, remember that we have been seeing a pattern of gap ups in the morning, then selloffs in the afternoon. So, keep those stops in place. You can learn more about how to manage your trades when opening gaps occur by reading the MTG Opening Gap Rules.


Today’s watch list:


PPH – Pharmaceutical HOLDR
Long

Trigger = above 75.25 (above the convergence of the 20 and 50-day MAs)
Target = 77.95 (resistance of last major high from September)
Stop = 74.50 (below yesterday’s close)

Notes = See the commentary above for an explanation of this trade setup. Also, since the futures are gapping up, remember the MTG Opening Gap Rules are in effect. If PPH gaps up to open above its trigger price, we will wait until a break of the 20-minute high before buying it.


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:

    WMH long (from October 13) –
    bought 44.12, sold 43.45, points = (0.67), net P/L = ($70)

Open Positions:

    (none)

Notes:

The breakout in WMH failed to hold yesterday and we were stopped out. Typical example of the recent lack of follow-through.

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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