The Wagner Weekly
March 31, 2003

Weekly ETF Snapshot

Last week's trading was quite uneventful and filled with narrow and choppy intraday ranges. After the opening gap down of last Monday (March 24), the market essentially traded in a narrow range for the entire week, making it to difficult to find good risk/reward intraday trading opportunities. Last week's total market volume was about 32% less than the previous week, which caused many false breakouts and breakdowns on an intraday basis. However, a decline in volume is what you would expect to see when the market retraces from a sharp rally and is actually a bullish signal. Although it may seem like the major indices gave back a lot of their previous gains last week, the reality is that each of the major indices only retraced 1/3 from their lows of March 12 to the highs of March 21 as of the close on Friday, March 28. For example, SPY (S&P 500 Index) dropped approximately 5% last week, but that is only a 1/3 retracement from the 15% rally that occurred during the two prior weeks.

As we have mentioned in the past, Fibonacci is one of the best technical indicators you can use to determine the likelihood of a whether or not a rally is likely to continue or fizzle out (click here to read about Fibonacci). The major Fibonacci retracement levels are 38.2%, 50%, and 61.8%. Interestingly, the lows of last week in each of the major indices (SPY, QQQ, and DIA) was almost exactly equal to the first Fibo retracement level of 38.2%. Here are the daily charts, as represented at the close of trading last Friday:







The major indices:

Rather than presenting our usual trendline analysis in the major indices this week, we wanted to discuss Fibonacci retracements because these levels are very important when analyzing pullbacks of uptrends. During the past two days, in the beginning of the current week, each of the major indices broke below their 38.2% retracement levels and dropped to their respective 50% Fibo levels. If the rally retraces BEYOND 50% to the 61.8% level, the odds of the market stabilizing and heading back up to the highs is greatly decreased. However, if the 50% level holds as the lows this week, it could just as easily position us for a climb back to the highs. But, to give you an idea of how well each of the major indices have been holding up since the retracement began on March 21, let's take a quick look at the daily charts based on closing prices of yesterday (March 31). We'll begin by taking a look at SPY (S&P 500 Index):



As you can see from the chart above, SPY briefly probed below its 50% retracement yesterday, but closed above it. It's also fascinating that the high of the March rally stopped exactly at the 200-day moving average. As of yesterday, the 20 and 50-day moving averages have converged at the 85.15 area, about 40 cents above yesterday's close. Obviously, these moving averages are important levels and it's important that SPY quickly rallies back above these moving averages within the next one to two days or else the convergence will begin to act as the new resistance level. Most importantly, SPY needs to hold above yesterday's low or else it will have retraced more than 50% of the rally, which would significantly decrease the odds of higher prices in the short term. But, for now, it seems likely that the area of price congestion that occurred throughout most of February will act as support for SPY (barring any significant negative war news). Next we'll take a look at a chart of DIA (Dow Jones Indu. Avg.):



The daily chart of DIA above is very similar to the SPY chart. DIA closed right on its 50% retracement level and the 20 and 50-day moving averages are approaching a convergence point just overhead of yesterday's close. For DIA, you basically need to watch the same overhead resistance levels that SPY is facing (the 20 and 50-day MAs, the 38.2% retracement level, and then yesterday's high). Again, it's important that DIA holds above yesterday's lows or else it will be in danger of reversing the uptrend. Finally, here is the daily chart of QQQ (Nasdaq-100 Index):



You will immediately notice that the chart of QQQ is a bit different than SPY and DIA because QQQ closed BELOW the 50% retracement level yesterday. However, before you jump to the instant conclusion that the Nasdaq is showing relative weakness to the S&P, you need to realize one important factor -- the Nasdaq has been showing relative strength to the S&P all year. Notice how QQQ's low of March was HIGHER than it's lowest point in February, whereas both SPY and DIA traded well below their February lows during the month of March. Also, QQQ is the only one of the three main indices that is still trading in positive territory for the calendar year. This is confirmed by the fact that QQQ is trading ABOVE both its 50 and 200-day moving averages, but SPY and DIA are both below those same moving averages. Therefore, although the Nasdaq has retraced more than 50% of the March rally, it is simply getting back in sync with the rest of the broad market because it had a "head start." Overall, I would not place too much emphasis on the fact that QQQ has retraced a greater percentage than SPY and DIA. Most importantly, I still love the weekly chart of QQQ, which is clearly showing a break of a two-year downtrend line. Take a look at the weekly chart:



Notice that QQQ broke above the uptrend resistance two weeks ago and has now pulled back to that same level. Because prior resistance becomes the new support level, we expect QQQ to begin finding support here that could ultimately position it for a strong rally that sets new highs of the year. Although QQQ is slightly below its 20 and 50-week moving averages, a greater degree of leeway is required when looking at a longer timeframe such as a weekly chart. In other words, I would not consider a one-day drop with a difference of 30 cents to represent that "QQQ has dropped below its weekly moving averages." When looking at a weekly chart, those numbers become less precise. So, we maintain our bullish stance (and our long position) on QQQ in the short term, but only if it holds above the weekly trendline shown on the chart above. Even though it goes without saying, remember that war news can easily dominate the market more so than technicals right now.

You may have noticed that total market volume was pretty decent yesterday. In fact, total volume in both the NYSE and Nasdaq was higher than any individual day of last week. While the increase in volume is good to see, we need to be a little bit cautious because declining volume outnumbered advancing volume by more than 3 to 1. This basically means that selling volume was heavier than buying volume (based on trades going off on bid or ask price). In order to confirm the market will hold at the 50% level, we need to see advancing volume begin to outpace declining volume, so we'll keep a close eye on that going into the rest of the week. Overall, we remain technically bullish in the short-term, but with caution.

To receive ETF analysis like this on a daily and real-time intraday basis, sign-up for a free trial to The Wagner Daily and ETF Real-Time Room (limit one free trial per household).

Sector Notes:

No sectors made any major trend changes and only a few trigger levels were changed. These changes are all represented in this week's issue of the MTG Sector Trend Trigger List.

We began focusing on trading the fixed-income (bond) ETFs this week (on the short side) and will be writing an article about this in the coming week. Fixed-income ETFs bring a whole new dimension to your daily ETF trading opportunities and we are pleased to add this realm to our daily trading setups.

CLICK HERE to download this week's "Sector Trend Trigger" list (you will need the free Adobe Acrobat Reader to view the file).

Closing Thoughts:

Much of the general public views the exchange markets too much like a retail market. A stock at $20 last week selling for $10 this week is NOT 50% off! Don't go out and buy it because it's "cheap." You'll be hearing this retail jargon in the news telling you the stock is "half off" or something. We all had that feeling at one time or another and were tempted to snatch some up, but don't fall into that trap. We are all trading in an AUCTION market. Remember, that's the reason there is a bid and an ask. The price the stock is being offered at is the price that it is worth right now determined by the supply and demand of the marketplace. Traders will tend to sell more when it's "50% off" to those stuck in the retail mindset, which is completely opposite of what you are supposed to do. Conversely, when shares make new highs, professional traders buy more shares, while the 50% off bargain hunters see it as "too expensive to buy." You need to have a paradigm shift with your state of mind if you wish to succeed either as a short-term trader or even a long-term investor.

Deron Wagner
MTG Founder and President

Chris Chang
MTG Associate Editor

Weekly Reality Report

Below is a summary of the performance of each MTG trade that was closed during the period of March 25 - 31, 2003. It was basically a boring, breakeven week as the market just chopped around in a narrow range. Although not yet reported in the stats below, we are also in the money with open positions in BBH long and IEF short. We also have an unrealized loss in an open position of QQQ. Net results from these open positions will be included in the trade stats during the week those positions are closed.Click here for a detailed explanation of how Morpheus Trading Group calculates and reports its trading results.

Click here to view a detailed cumulative summary of every MTG trade since the end of October, 2002 (updated weekly).

Odds and Ends



Come trade with us LIVE in Las Vegas! Morpheus Trading Group is presenting a live, real-time ETF Trading Workshop for active swing traders, day traders, and investors on May 15 & 16, 2003 in Las Vegas, Nevada. Learn how to become highly consistent and profitable by looking over the shoulders of two professional ETF traders, Deron Wagner and Steve Bell, for only $295! Seats are limited, so please click here for complete details or to register online.


Deron M. Wagner
Founder and President

Morpheus Trading Group
www.morpheustrading.com
The Leader in ETF Trading!

DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Weekly ( hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may buy, sell or have a position in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.
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