The Wagner Daily


session was a real snoozer because, due to the Veteran’s Day holiday, total
market volume was light and not much happened in any of the major indices. Each
of the major indices opened near their previous day’s closing prices, traded
near their respective previous day’s lows, and closed nearly flat. Yesterday’s
trading range was so narrow that the S&P futures remained in only a 5-point
range throughout the entire day. According to our calculations, it was the
tightest intraday trading range in the S&P futures since August 27. Needless
to say, yesterday did not present a lot of trading opportunities on either side
of the market, so we remained mostly in cash, with the exception of the swing
shorts in ONEQ and DIA. The S&P 500 and Dow Jones Industrials both closed
flat on the day, but the Nasdaq again showed slight relative weakness and closed
0.5% lower.

Shifting gears a bit, we would like to bring your attention
to EWJ, which is the ETF that tracks a large basket of Japanese equities.
Long-time subscribers to The Wagner Daily will recall that we have been
bullish on the long-term prospects of Japan since the beginning of this year.
Since coming out of its 21-year bear market, it is our opinion that Japan is now
entering a bull market that will be sustained for at least 3 – 4 years. As such,
our plan has been to buy EWJ on each major pullback, hold it for a few weeks to
months, and sell it into each new high. Through this strategy, we netted over a
30% gain in two separate EWJ trades earlier this year. Since then, we have been
stalking EWJ and waiting for a price correction in the Nikkei that would allow
us to re-enter EWJ at a lower-risk price. With the recent correction in the
Nikkei, we feel it may soon be time to buy back into EWJ.

Although EWJ
broke below its 50-day moving average yesterday, we would like to see a bit more
of a price correction because of the huge move that EWJ has made since May. In
order to predict an ideal entry point, we have drawn an uptrend line on the
WEEKLY chart of EWJ, starting with the May 2003 low. The chart below illustrates

Notice how the uptrend line that we have drawn converges with the
20-week moving average, right around $8.60. We feel this convergence provides a
solid support level that will allow us to re-enter EWJ with relatively low risk.
Furthermore, if you drew Fibonacci lines, you would see that the 8.60 level also
converges with the 38.2% retracement level from the May low up to the October
high. So, it’s probably not time to buy EWJ yet, but it is on our radar screen
and we are watching carefully. We are also watching EWH, the Hong Kong (China)
Fund, as well.

In yesterday’s Wagner Daily, we focused our attention on
the 20-day moving averages in each of the major indices because we anticipated
the 20-day MAs would act as key support/resistance levels in the coming week.
Because the major indices basically closed flat, right on their 20-day moving
averages yesterday, it is likely that we will either see a solid bounce off of
these 20-day MAs or a quick break of support, which would probably take the
major indices back down to their 50-day MAs within the next day or two.
Therefore, continue to keep a close eye on the 20-day moving averages of the
major indices today. To make this easier for you, we have listed yesterday’s
closing prices and the corresponding prices of the 20-day moving averages for
each of the major broad-based ETFs below:

SPY (S&P 500 Index) –
closed at 105.15, 20-day MA at 104.98
DIA (Dow Jones Industrials) – closed
at 97.62, 20-day MA at 97.69
QQQ (Nasdaq 100 Index) – closed at 35.06,
20-day MA at 35.14

Yesterday’s price consolidation near the previous
day’s lows was representative of a correction by time. Rather than the major
indices retracing higher to meet the intraday moving averages, they traded
sideways yesterday. Just as a sideways consolidation at the highs is more
bullish than an actual price correction, a consolidation at the lows is
generally more bearish than if the broad market bounced higher. This would lead
us to believe the major indices are poised to go lower today. However, keep in
mind that volume was light yesterday because of the holiday. This means that we
may not have been seeing a true representation of what the “big money” intends
to do here because many market players were absent from trading yesterday.

When the market failed to react to positive economic news last Friday,
it was one of the first events that may have indicated a changing of sentiment
from bullish to slightly more bearish. If the major indices solidly break below
their 50-day moving averages within the next several days, this would confirm
that an intermediate-term correction is under way. But, we need to trade what we
see and, as of right now, the major indices are still holding onto support of
their 20-day moving averages. In order to predict how high any bounces or
rallies may go, you can measure the distance from the recent 52-week highs, down
to yesterday’s lows. From that range, the 38.2% and 50% retracement levels from
the lows are likely to act as strong resistance and would provide a point at
which to sell into strength.

If you are sitting on long positions that
you bought at much lower prices, now may be a good time to lock in some profits
or at least tighten up your stops. If you bought near the recent highs and your
long positions are against you, it is even more critical to use tight stops to
protect against substantial losses if the major indices break their moving
average support. As for shorts, we think it is relatively low risk to initiate a
few short positions here, just as long as you keep stops over the recent 52-week
highs, or even tighter if you are risk averse. Overall, the broad market seems
to be at a “make it or break it” point in which a sharp, sudden move is bound to
happen soon. Nobody knows which way it will go, but be alert and remain nimble.
We feel this is a more dangerous time than usual to be lax with your stop loss
orders on BOTH sides of the market.

Today’s watch list:

RTH – Retail HOLDR

Trigger = below 92.78 (break
of 20-day MA and yesterday’s low)
Target = 90.50 (support of the 50-day MA)

Stop = 93.80 (above yesterday’s close)

Notes = The Retail sector has
been showing relative strength to the S&P for several weeks. However, many
of the individual leaders of the sector now appear poised for a price
correction. Therefore, we will be shorting RTH if, and only if, it breaks below
its 20-day moving average, with a target of the 50-day MA. Remember to watch
$IRH.X, which is the index for RTH, because it gives you a more accurate picture
of the fair value of RTH and does not have the wide spread of RTH. So, RTH is
the ETF we trade, but we watch $IRH.X to track the price of RTH.

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:

    ONEQ short (1/2 position from Nov. 10) –
    shorted 78.28, covered 77.21,
    points = + 1.07, net P/L = + $103

Open Positions:

    ONEQ short (1/2 position from Nov. 10) –
    shorted 78.28, new stop 78.25,
    new target 75.75, unrealized points = + 1.10, unrealized P/L = + $110

    DIA short (from Nov. 10) –
    shorted 97.75, new stop 98.40, target
    96.30, unrealized points = + 0.15, unrealized P/L = +


Per intraday e-mail alert, we covered half
of the ONEQ short position yesterday morning to lock in gains as the Nasdaq
neared price support. ONEQ traded down to our price target of 76.90 yesterday,
but we will continue trailing a stop on the remaining shares because the Nasdaq
remained weak. Note the new stops for both ONEQ and DIA, as well as the new
target for remaining ONEQ shares.

Edited by Deron Wagner,
Founder and President