The Wagner Daily | October 29, 2003

Commentary:

All systems were go yesterday as the major indices each turned in
impressive gains following the Fed’s positive comments on the labor market and
their expected decision to keep interest rates unchanged. Prior to the FOMC
announcement at 2:15 pm, the broad markets were diverging sharply as the S&P
500 Index trended slightly lower throughout the morning, but the Nasdaq trended
higher due to relative strength in the Semiconductor Index. However, despite
early relative weakness in the S&P, every major index rallied sharply during
the final ninety minutes of trading as the broad market responded quite
favorably to the lack of surprises by the Feds. ONEQ (Nasdaq Composite Index)
closed 2.7% higher, with half of its gains coming during the final hour of
trading. Within the Nasdaq, the Semiconductor HOLDR (SMH) surged nearly 6%
higher and closed at a new 52-week high! The Internet HOLDR (HHH) also gained
more than 3%, although it did not set a new high. SPY (S&P 500 Index) and
DIA (Dow Jones Industrials) both lagged the Nasdaq and each closed approximately
1.4% higher. Within the S&P, the Retail HOLDR (RTH) showed relative strength
and also closed at a new 52-week high.

The most important thing about
yesterday’s rally was that high volume confirmed the move. Yesterday saw a
whopping 36% increase in the Nasdaq’s total market volume and an impressive 21%
increase in the NYSE volume! It was the first day in several months in which the
major indices closed sharply higher, but also on strong volume. Because the
prices of the major indices closed higher AND on higher volume than the previous
day, it met the technical definition of an “accumulation day,” which usually
indicates institutional buying. Unlike recent rallies in which volume was dull,
it was refreshing to see the sharp volume increases across the board. It was
actually the highest volume day in the NYSE since September 3. Overall, the
market acted exactly as you would want to see in order for a rally to be
sustainable. Volume is the one technical indicator that doesn’t lie.

One
thing I found interesting about yesterday is how well the 200-period moving
average on the 15 minute chart acted as support for SPY yesterday. Just as this
200-MA perfectly acted as resistance on the morning of October 27, it became the
perfect support level yesterday morning. This was a clear example of how a prior
resistance level becomes the new support level once the resistance is broken.
The 15-minute chart of SPY (S&P 500 Index) illustrates this:

As you can see, the 200-period moving average is such a powerful support
or resistance level and you can usually use it as a pivot point for placing your
protective stops. Rarely will a stock or index break through a 200-period moving
average from below or above without first bouncing off of it. The 200-period MA
is powerful on any time frame, but the longer chart intervals are always going
to have more weighting than the shorter ones.

We bought OIH (Oil
Services HOLDR) for a swing trade yesterday and sent a corresponding e-mail
alert to Wagner Daily subscribers. The e-mail detailed the entry, stop,
and target prices of the trade, but did not explain the detailed rationale for
entering the trade. Therefore, I though it would be beneficial to summarize why
we made the decision to buy OIH yesterday. In doing so, you will understand a
few of the things we look for when selecting swing trade setups.

One of
the main things we look for when selecting a trade is a confluence of technical
indicators, especially convergence of trendlines on multiple time frames. The
more indicators that point to a particular price direction, the more you are
putting the odds of a profitable trade in your favor. In the case of OIH, we
used a “top-down” approach, rather than a “bottom-up” approach to analysis. This
means that we started by looking at the big picture first and only then did we
narrow our analysis down to a smaller time frame. As any seasoned trader will
tell you, “top-down,” rather than “bottom-up,” produces the most consistent
results. When scanning different time frames, you want them all to line up,
starting with the longest first and then “drilling down” to the shorter time
frames. In the following three charts, you can see that OIH has set up for a
long entry on the weekly, daily and hourly charts. We’ll begin by looking at the
longest of the three, the weekly chart:

In the weekly chart above, notice how OIH is again finding
support at its weekly uptrend line. It is also forming a bullish “hammer”
candlestick on the current week’s bar. Next, we look at the daily for a more
precise entry point:

The daily chart is showing a clear over-extension away from
the 20-day moving average, as indicated by the orange arrow. This alone does not
tell us precisely WHEN it will reverse, but it tells us that we are likely to
see a snap back soon. However, a bullish “hammer” candlestick formed on
yesterday’s chart, telling us we have a low-risk entry point. Although not
illustrated, volume also increased yesterday. Finally, we look at the hourly
chart for our precise entry point:

We bought OIH yesterday at $55.15 when it broke through
resistance of its hourly downtrend line, as illustrated in the last chart above.
This trendline break gave us the confirmation that the sellers had thrown in the
towel, at least for now, and buyers are likely to take the upper hand in the
short-term. Our stop is at 54.40, just below yesterday’s low. A good first
target is at least 57.50, which is a re-test of the 20-day MA.

Although
we could have easily bought a raging sector such as the Semiconductors (SMH)
yesterday, we often prefer to take the lower-risk reversal setups, rather than
buying a breakout to new highs. Either one can net you profits, just as there
are many different styles for traders to profit intraday. Our focus is, and
always has been, on hitting consistent singles. This will sometimes cause us to
miss the “homerun” plays, but that’s not what we’re after. While they sometimes
happen by means of a pleasant accident, swinging for homeruns has severely
shortened the lives of many would-be traders. We’ll stick to good risk/reward
setups any day.

Not a whole lot to say about the broad market today.
Because of the strength of yesterday’s rally, we are likely to see a simple
consolidation in order to absorb yesterday’s gains. We are well above the 20-day
moving averages now, so expect those levels to provide support on any
retracement. Everything looked great with yesterday’s volume surge, so a
consolidation today should be reflected by lighter volume in order to increase
of the gains being sustained.

Today’s watch list:

We are currently
long OIH, as per above. Will send an e-mail alert if/when we spot any other
entries. We would want to see either a consolidation or retracement to support
before buying the broad market here. It looks good, but we just don’t want to
chase a big run.

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:

P/L = ($59)

QQQ short (HALF position from
October 27) –
shorted 34.20, covered 34.52, points = (0.32), P/L =
($70)

Open Positions:

unrealized P/L = + $35

Notes:

The
overnight plays in DIA and QQQ short did not follow-through and we were stopped
out yesterday. We bought OIH (see commentary earlier) and are long going into
today.

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