The Wagner Weekly
November 24, 2003

Weekly ETF Snapshot

The broad market began the holiday-shortened week in a festive mood yesterday as each of the major indices rallied sharply off of last week's consolidation at the 50-day moving averages. After the major indices began yesterday with an opening gap above the previous day's highs, they each trended smoothly higher throughout the first hour of trading before entering into a sideways consolidation during the late morning that lasted through the early afternoon. After correcting by time, buyers once again stepped in during the final 90 minutes of trading and pushed the major indices to new intraday highs, which is where they closed the day. Most importantly, volume in the Nasdaq increased by 10.5% yesterday, although it only increased by 3.5% in the NYSE. Since the major indices increased AND on higher volume, yesterday was technically known as an "accumululation day," which is the opposite of a bearish "distribution day." The Nasdaq Composite led the broad market yesterday with its highest percentage gain (2.8%) in four months. The S&P 500 Index and Dow Jones Industrials rallied 1.6% and 1.2% respectively.

Yesterday's rally pushed most of the indices back above resistance of their 20-day moving averages and last week's highs that we discussed in yesterday's Wagner Daily. On an intraday basis, the steady uptrend provided numerous trading opportunities, but there were not any clear trade setups in the broad market for swing traders because the major indices were trapped between support and resistance going into yesterday morning. Unfortunately, the picture is even trickier going into today because the broad market closed right in the middle of the "chop" from the first three weeks of November. The daily chart of the Nasdaq Composite below illustrates this horizontal range of "chop":



As you can see from the price band above, which also looks the same for the S&P and Dow, it's anybody's guess what the market does today because this is the same price zone that caused a lot of resistance just a few weeks ago. If the indices break out above this range, they will be at new 52-week highs and represent clear sailing. But it's more likely that the broad market chops around in this range for the rest of the week, especially due to the shortened week and lack of institutional participation around the holiday. Therefore, you will probably find better odds of success with trading individual sector ETFs that are showing relative strength or weakness, rather than trading the broad-based ETFs such as SPY, QQQ, or DIA.

One of the ETFs that caught our attention yesterday was EWJ (Japan Fund), which Morpheus Trading Group bought when it pulled back to support at the 8.60 area last week (see the The Wagner Daily archives for details). Unlike a vast majority of our trades that are based purely on technical analysis, we bought a "long-term" position in EWJ based largely on fundamental analysis because we are bullish on Japan and other Asian countries over the next several years. However, through the use of technical analysis, we were able to pinpoint a low-risk entry point to buy EWJ, even though the trade is based largely on fundamentals. By combining fundamental and technical analysis, we are able to benefit from the "best of both worlds," although the most important factor is the technical analysis because it enables us to enter the trade with a good risk/reward ratio.

In addition to Fibonacci, the primary technical analysis tool we used to determine last week's long entry in EWJ was the 20-week simple moving average. Notice that we used the 20-WEEK moving average as opposed to the 20-DAY moving average. The difference, of course, is that the 20-week moving average calculates the average price of the past 20 weeks instead of the past 20 days. While most traders use moving averages on daily charts, few traders we have met understand the importance of weekly charts. Because the time frame of a weekly chart is so long, you really cannot base short-term trade decisions purely on weekly charts, but the weekly charts are of key importance in showing you the "big picture" of major trends in an index or stock. EWJ is a good example of this.

When we bought EWJ after last week's price correction, the daily chart did not look very bullish because EWJ had broken below both its 20 and 50-day moving averages. The daily chart below illustrates this:



Although EWJ was below its primary moving averages on the daily chart, we focused more of our attention on the longer-term weekly chart simply because we entered the trade with the intention of holding it for several months or more. Therefore, a longer-term time horizon for the trade required a longer-term technical analysis. When we analyzed the weekly chart of EWJ, it showed a much different picture than the daily chart. Primarily, the weekly chart showed that EWJ had perfectly retraced down to support of both its 20-week moving average AND its primary uptrend line from the low of May. Take a look at this convergence of support:



Yesterday's 2% rally in EWJ immediately put our long position "in the money" by the same percentage because we bought at the bottom of last week's correction. If we were only looking at daily charts, we would never have been able to predict such a precise and low-risk entry point. However, by expanding our time frame to weekly charts, the picture became very clear that we had convergence of a 20-week moving average and primary uptrend line from the low of May. This convergence provided us with a good risk-reward for buying EWJ. If you want to play it really conservatively, you can place your initial stop just below last week's low of 8.55, which would represent a break of both the primary uptrend line and the 20-week moving average. However, because of our long time horizon, we are giving this trade a little more wiggle room and using the 50% Fibonacci retracement of the entire move as our stop, right around 7.90. As always, we will trail stops higher as the trade becomes more "in the money." If you like the EWJ trade idea, you may also wish to check out EWH (Hong Kong Fund) because it too is nearing primary support.

If you wish to learn about ETF trade entries, such as EWJ, on the same day they occur, sign up for a free trial to The Wagner Daily or other MTG services by clicking here (limit one per household). Also, remember that all previously published issues of both The Wagner Daily and The Wagner Weekly are available in the "Archives" section of the MTG web site. If you are new to our services and wish to broaden your knowledge of ETF trading or our general trading style, we recommend you browse the archives because it is very educational and free!

Sector Notes:

HHH (Internet HOLDR) led the decline of several sectors into the descending trend list last week. If you are looking for weak sectors to describe the latest down turn in the market, note the highlighted ones in the descending industry category of the updated MTG Sector Trend Trigger List. The bond market is looking healthy, as 3 of 4 fixed-income ETFs are breaking above their October highs. These tickers all appear on the ascending bond category of the list. TLT (20+yr T-Bond) looks the best of the bunch because the November low was higher than the October low. This conforming action between the bond and equity markets indicates a rotation to a conservative stance in the near-term outlook. Look for new entries to the international descending list if we see further correction in the U.S. markets.

Below is the daily chart of XLE (S&P Select Energy Sector Spyder) showing the many notations from the List. Starting from the left of the chart, we see a green up arrow pointing to the candlestick bar that triggered an ascending trend on August 7, 2003. The pink ellipse identifies the second anchor, but Point # 2, the swing low, is the Next Trend Reversal Reference Date and Trigger Price. This price level is indicated by the dotted red horizontal line. Point # 1 is the candlestick that broke below the lower trend channel or trendline. Point # 3, indicates a retest of the previous high. The two highs form a Double Top formation. All of this shows that XLE is on a very weak ascending trend and currently range bound between Points #2 and #3.



The new changes and trigger levels to all the ETFs we follow are updated in this week's MTG Sector Trend Trigger List, which is currently free for all to view. The list is designed for longer-term investors who prefer to base their investment decisions on technical analysis and primary trend lines. When viewing the list, simply click on the link for each ETF on the list to instantly see current, annotated charts of each ETF!

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

Closing Thoughts:

It's time to get to know your ETFs a little better. Go to amex.com to find various details and information about most of the commonly-traded ETFs. Top ETFs by volume are QQQ, SPY, SMH, EWJ, DIA, IWM, XLF, and OIH. At amextrader.com, under Trading Data, Amex Issues Monthly Data, you can find the progression of ETF trading interest and volume by typing in an ETF ticker in the "Trailing 12-month History By Symbol" field. You'll get the feel how the ETF will behave by watching the bellwether stock in each sector. The top three companies in each sector tend to switch dominance over the course of the year. You may also wish to check out www.holdrs.com or ishares.com for additional information on sector-specific ETFs.

Deron Wagner
MTG Founder and President

Chris Chang
MTG Associate Editor

Weekly Real-Time Room Report

Since its inception, Morpheus Trading Group has distinguished itself by the quality of the trade setups it offers, rather than the quantity of those setups. This is certainly true of The Wagner Daily, which typically provides one or two high-probability ETF trade setups every morning. MTG's new launch of the Intraday Real Time Room is no exception to this rule. Below are some statistics from the last two weeks of the Real-Time Room's new format, which includes intraday stock trades, as well as ETF's:

Nov. 10-14 - 17 trades, which resulted in 11 wins and 6 losses (accuracy of 65%)
Nov. 17-21 - 14 trades, which resulted in 10 wins and 4 losses (accuracy of 71%)

Of the 14 trades MTG took last week, only 11 were daytrades and the other 3 were called as swings. Out of the 11 daytrades called, 9 were winners, giving us an accuracy rate of over 80% on the intraday calls for the week (complete trade details available by clicking here).

If you only pick the highest quality of setups, it's not necessary to overtrade and do more than 2 - 3 trades per day. Discipline is a key element of the Morpheus Trading Group intraday strategy, and as you can see from the statistics above, we exercise patience every day to find and deliver only those trades that have the highest probability of success to our subscribers.

Intraday Real Time Room Play of the Week:

On Friday (Nov. 21st), we noticed that the drug sector was showing some weakness on the open. The Dow and SPX actually bounced at 9:30, but the drug index was down immediately on some less than stellar news from industry leader, Merck (MRK). Knowing then that the sector had relative weakness, we immediately selected Pfizer (PFE) and Eli-Lilly (LLY) for short plays at the first reversal period of 9:50 - 10:10 am. The following charts illustrate how these 2 stocks became short setups for us.....





At around 10 am it was evident that the broad market would reverse course from its initial bounce and head downward. This, coupled with the weakness in the drug sector, gave us a perfect "top-down" trade setup to short these 2 leaders in the pharmaceutical sector. As the trade went in our favor, we began to take profits by scaling out. When the broad market began to gain strength and reverse course at 11 am, we covered the last portions of the PFE and LLY shorts for average gains of +.22 and +.80 respectively.

The above example is indicative of our style of play in the Intraday Real Time Room. As always, Morpheus focuses on the quality of trade setups rather than the quantity. Although subscribers to the room receive constant alerts and updates as to stocks and sectors that are currently in play, Morpheus prides itself on limiting its "official calls" to 3-5 per day. Thereby, cherry picking only the best setups for maximum educational value for our subscribers. Click here for a free trial.

Peter Reznicek
MTG Intraday Real-Time Room Moderator

Weekly Reality Report

Since the Wagner Weekly was not published last week, the trade stats below represent all trades MTG entered and exited for the past two weeks, from November 10 - 21, 2003. Note that open positions are not reported until the actual week they are closed.

Stats from The Wagner Daily newsletter (ETF swing trades only):

Stats from the Intraday Real-Time Room (individual stocks; mostly intraday trades): Click here to view detailed cumulative stats of each trade MTG has made (updated weekly).

Click here for a detailed explanation of how MTG calculates and reports its weekly trading results.


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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Charts from Tradestation (www.tradestation.com) and eSignal (www.esignal.com)