The Wagner Daily | October 31, 2003

Commentary:

Sparked by a strong GDP number in the pre-market, the major indices
began the day with a large opening gap up. It initially appeared as if the broad
market would blast through its prior October 15 highs, but the bears immediately
took control and sold into the strength. Within the first thirty minutes of
trading, each of the major indices had sold off sharply, closed the gap, and
pierced into the middle of the previous day’s range. The broad market
subsequently stabilized and eventually attempted to rally in the afternoon, but
that rally also failed due to the overhead resistance and trapped bulls who
bought the opening gap. Another wave of moderate selling hit the market during
the final hour and caused each of the major indices to close near their morning
lows. The S&P 500 Index and Nasdaq Composite both closed with fractional
losses, but the Dow Jones Industrials, which showed relative strength all day,
closed a few points higher.

Yesterday morning’s price action was a prime
example of why we always wait 20 – 30 minutes before buying the market whenever
there is a large opening gap. If a large opening gap remains intact after the
first thirty minutes of trading, it indicates the market is stable and will
usually result in higher prices on top of the gap. However, if a gap is going to
fail, it will usually occur within the first 20 – 30 minutes of trading. We
designed the MTG Opening
Gap Rules in order to reduce the likelihood of buying a failed gap up or
shorting a failed gap down. Below is a 5-minute intraday chart of SPY (S&P
500 Index) that illustrates how quickly the opening gap was filled:

We were initially targeting MDY (S&P Midcap Index) as a buy setup
going into yesterday morning, but it gapped up above our trigger price and
immediately began selling off with the broad market. However, the MTG Opening
Gap Rules kept us out of trouble by dictating that we would only buy MDY if
it subsequently traded above its high of the first 20 minutes, which never
happened.

On another note, I found an interesting example yesterday of
how prior support of an uptrend line becomes the new resistance level once the
support is broken. In the hourly chart of SPY below, notice how the prior
support of the uptrend from the Oct. 24 low acted as the new resistance level
after SPY broke below it in the morning:

By constantly assessing where the primary and secondary trendlines are,
you will always be on top of knowing where to expect the major indices to find
support and resistance. Just remember that prior support becomes new resistance
once support is broken (and vice versa).

Total market volume came in
higher than the previous day on both the NYSE and Nasdaq yesterday. Therefore,
since both the S&P 500 Index and Nasdaq Composite closed lower on the day,
but on higher volume, yesterday was a confirmed “distribution day.” This marked
the third “distribution day” for both the NYSE and Nasdaq within the past three
weeks. However, don’t forget about the bullish price to volume relationship we
saw on October 28 and 29. The strong rally on October 28 was on much higher
volume than the previous day, meaning that it was a bullish “accumulation day,”
which was followed by a lighter volume consolidation day on October 29 (also
bullish). So, what does this all mean? It indicates that the market is showing
some seriously mixed signals right now and makes it very challenging to predict
the broad market’s next move. Yesterday’s price action alone confirms the
tug-of-war that is taking place right now. So, perhaps you will find better odds
of a profitable trade by sticking to the industry sector ETFs such as BBH
(Biotech), SMH (Semiconductor), or XLF (Financials), rather than attempting to
trade the mixed-up broad market ETFs such as SPY (S&P 500) or QQQ (Nasdaq
100 Index).

In yesterday morning’s newsletter, we discussed the
importance of watching how the major indices reacted as they approached the
prior highs of October 15. Interestingly, the high prices of yesterday’s failed
opening gap up were within pennies of the October 15 highs. I have listed
yesterday’s high prices and the prior highs of October 15 for each of the major
broad-based ETFs below:

SPY – Yesterday’s high = 105.83, Oct. 15 high =
105.89
DIA – Yesterday’s high = 98.60, Oct. 15 high = 98.83
QQQ –
Yesterday’s high = 35.86, Oct. 15 high = 35.85

As you can see, QQQ
formed a perfect double top at its prior 52-week high yesterday, while SPY and
DIA both came within chump change of testing their prior highs. Based on
yesterday’s immediate selling into the gap, it’s apparent that the prior 52-week
highs from October 15 are acting as a major point of resistance. Therefore, we
recommend you keep tight stops on any long positions you may be swinging, in the
event of a reversal near yesterday’s highs. It’s a bit too early to recommend
any specific short positions based on yesterday’s closing prices. However, we
will look at possible shorts if the major indices break below their 20-period
moving averages on the hourly charts. Remember that the length of time between
each subsequent test of those 50-day moving averages has been decreasing and it
would not surprise me to see another reversal back down to test those levels
again, ESPECIALLY if the market is unable to break the October 15 highs. On the
other hand, if we blast through the October 15 highs on strong volume, all bets
are off on the short side. So, we’re taking a “wait and see” approach right now
before getting too aggressive on either side, but you know what levels to watch
going into today: the October 15 highs as resistance above and the 20-MA on the
hourly charts for support below. Have a fun weekend and scare up some profits
today!

Today’s watch list:

SPY – SPYDER (S&P 500 Index)
Short

Trigger = below
the low of first 30 minutes
Target = 104.05 (50% Fibonacci retracement of
last rally)
Stop = 105.75 (above yesterday afternoon’s prior high)

Notes = SPY has been showing relative weakness, so we are looking to
short it ONLY IF it breaks below its low of the first 30 minutes of trading
(whatever price that may be). Odds are good that if it sets a new low after
thirty minutes of trading, it will establish a downward bias for the day. We
will then adjust our stop accordingly. We will e-mail an alert when/if we short
SPY, in case you are not able to monitor the first 30 minute low.

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 = ($28)

Open Positions:

unrealized P/L = + $19

Notes:

Due to the large opening gap up, the MDY buy setup was invalidated
and we did not enter.

We sold the second half of our initial position in
OIH yesterday morning, but bought back in to a full position of OIH a few
minutes before the close due to the relative strength the Oil Service HOLDR was
exhibiting. It appears we may have just been a day early in our initial entry,
so we have re-entered with a new stop at 54.10, just below yesterday afternoon’s
prior low.

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