The Wagner Weekly
December 8, 2003

Weekly ETF Snapshot

The short-term technical picture for the broad market continues to show us mixed signals. Over the past week, prices have drifted lower after the Nasdaq failed to breakout to a new high at the 2000 level. However, with the exception of one clear "distribution day" last week, the market has been drifting lower on decreased volume. On an intraday basis, the price action of both the S&P and Nasdaq futures remains as indecisive and erratic as we have seen in a long time. Therefore, rather than "rolling the dice," we will continue to avoid trading the broad-based ETFs such as SPY, DIA, and QQQ until the major indices begin showing signs of trending more steadily (either up or down). Lately, the broad market has largely been ignoring moving averages and other technical indicators on an intraday basis. Rather than attempting to trade ETFs such as SPY or QQQ, we have been finding much more profitability by seeking out individual sector ETFs that are showing relative strength or weakness to the broad market. This modified strategy resulted in a total net profit of more than 6 points in RTH (Retail) short, HHH (Internets) short, BBH (Biotech) long, and OIH (Oil Service) long last week.

Last Friday's losses caused the Nasdaq Composite to close below its 20-day moving average after only trading above it for 7 days! This is the shortest length of time the index has spent above its 20-day MA, without crossing back down below it, since the primary uptrend began early in the year. This indicates a resumption of the pattern in which the Nasdaq has been subsequently spending less and less time above its 20-day moving average on each subsequent bounce off the 50-day moving average from below. In fact, the 50-day moving average has now risen so closely to the 20-day MA that the Nasdaq Composite is only 18 points away from breaking below its 50-day MA once again. Conversely, both the S&P 500 Index and the Dow Jones Indu. Avg. continue to show relative strength and are both well above their 20-day MAs (for now). The daily chart of the Nasdaq Composite below illustrates double top in the Nasdaq, as well as the close below its 20-day MA and the proximity of the 50-day MA just below:



The Oil Service Index ($OSX.X) broke out last Friday, which we predicted in last Friday morning's Wagner Daily, due to the previous day's technical break above its primary downtrend that had been in place for six months. Due to Friday's follow-through in the index, we bought OIH at $58.05 (per last Friday's Wagner Daily) when it rallied above its 200-day moving average. We are still long the position and have an unrealized gain of approximately 1.5 points so far. The sector showed great relative strength throughout the entire day and actually set a new intraday high as the S&P futures set a new low. As such, we took OIH long over the weekend in anticipation of further upside in the coming week. Just for educational purposes, the intraday chart below illustrates last Friday's divergence between OIH (Oil Service HOLDR) and SPY (S&P 500 Index):



As the chart above confirms, looking for sectors that are showing relative strength or weakness to the broad market increases your potential profits, but also decreases your risk because the sector will often ignore reversals in the broad market, as OIH did above.

On a separate note, the U.S. Dollar is trading at fresh multi-year lows against both the Euro and the Yen in the pre-market today. In the big picture, this is very bad news for the U.S. economy and could solely become the biggest reason for any further weakness in the market this week. As the dollar grows weaker, more and more foreign investors are forced to pull their assets from the U.S. due to the losses they are sustaining from currency devaluation. This has also been attributing to the extremely bullish action in both the price of Gold futures and individual gold stocks. I (Deron) personally bought a significant amount of gold (and silver) coins over the weekend due to gold's first WEEKLY closing price over $400 per ounce in over 7 years. Below is a very long-term monthly chart of Gold futures that illustrates the strong technical break of the former primary downtrend in the price of gold:



If anyone is interested in buying gold bullion or coins, instead of just gold mining stocks, consider checking out a company named Kitco, which is where I bought my gold over the weekend. MTG has no affiliation with Kitco, but we personally feel they are one of the most reputable gold dealers in the world and they also have a very informative web site on all things related to gold. As always, due your own due diligence and don't interpret this as a specific recommendation to buy gold. Just helping out those of you who have recently been asking us about where to buy gold. Don't forget about the gold mining stocks either (NEM, ABX, GFI, PDG, AU, GG, etc.). Finally, remember there is an FOMC meeting tomorrow, so the market is likely to be quiet today until the Feds speak.

If you wish to learn about Morpheus Trading Group's ETF trade entries 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:

Sector trend activity was exceptional last week. Several ascending industries formed swing lows and their reversal triggers were updated in this week's MTG Sector Trend Trigger List. XLU (Utilities), was one of three ETFs that reversed trends late last week. XLU has been on a steep ascent in the last two weeks and is currently sitting at a pivotal point. Ideally, because of the long run up to resistance, XLU may take a rest just below $22 support and then bust higher. Also on the List, keep alert to the sectors making new patterns annotated in the "notes" column. Check some of the highlighted bond ETF charts, (click the any ETF Ticker for a link to the chart) and note the nice bounce in the last 5 trading days. There were no major changes in the dynamics of the international ETFs. The monster movers, EWY (Korea), EWG (Germany), and EWC (Canada), gaining between 39 to 56% since we alerted you to their uptrends, are doing well. EWY has a tight reversal trigger now, so the year-long party may end soon.

Below is the daily chart of XLU. The close of the last candlestick is right at the trend reversal trigger level, which we don’t think is a coincidence. XLU will either continue heading higher, or break down into the trading range formed in the last few months.



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:

The year is ending and it may be time to clean house, or at least in your trading accounts. Do you have a lingering, rogue account somewhere that has a couple hundred dollars and the broker is sucking monthly fees from? It could be a mutual fund that you closed out and you have a few dollars credited to you from dividends. If so, you should take care of that soon. You may want to consolidate some accounts or prepare for the tax season. Also check the status of your holdings. Are you finding yourself holding on to the losers longer than the winners? Looking for a tax break by selling the losers before year-end? We all had that sell strategy once before, but it's not a viable one and now it’s time to change. Let's end in the black next year, looking to ride profits from our winners and dropping our losers quickly, according to our “modified” sell strategy and not the other way around. Happy Holidays from Morpheus Trading Group!

Deron Wagner
MTG Founder and President

Chris Chang
MTG Associate Editor

Weekly Real-Time Room Report

The market chopped around something fierce last week, but the MTG method of daytrading sectors and stocks with relative strength enabled the Intraday Real Time Room to post yet another profitable week regardless. In the current market conditions, it's becoming more and more evident that trading relative strength is the safest and most consistent trading methodology you can use. Buying relative strength and shorting relative weakness is what we teach to our subscribers and employ each and every day in the Real-Time Room.

Everyday at 9:00 am sharp, our RTR subscribers receive an e-mail entitled the MTG Pre-Market Bulletin (PMB). This short and succinct bulletin, in easy to read HTML format, contains breaking news that may affect the sectors that we trade. In addition, there is a "Sector Watch" portion every morning where sectors that are over or underperforming the market and may be close to pivots on their daily charts are highlighted and analyzed. Starting this week, an important addition is being made to the PMB. The bulletin will now include a full analysis of where the previous day's action left the S&P 500 and Nasdaq 100 futures markets. Discussion of support and resistance pivots, trendlines, and Fibonacci levels on multiple timeframes will be included. Some services charge hundreds of dollars per month for this information alone, but our RTR subscribers will be receiving this information daily in the MTG Pre-Market Bulletin, at no additional charge. Click here to view the archives of actual past issues of the MTG Pre-Market Bulletin.

Intraday Real Time Room Play of the Week:

Friday, December 5th was a down day for the broad market averages. All three of the major indices we follow (Dow, S&P 500, and Nasdaq Comp.) closed below their opening prices, so our bias was to the short side for most of the day. In looking for potential candidates, we were on the lookout for sectors that were showing relative weakness to the broad market. On Friday, the $XBD (Broker-Dealer index) was just such a sector. Any small bounce in the futures market was simply met with more and more selling in the beleaguered broker stocks such as MWD, GS, MER, LEH and others. We selected Merrill Lynch (MER) for a short side trade in the afternoon, which worked out well for us. An annotated chart of the setup follows:



As the chart above illustrates, we shorted a half position of MER at 55.03, anticipating a break of support below the black horizontal line pictured above. A sell stop was placed to short another half position MER upon a break of 54.90. The sell stop triggered and we were short a full position of MER at an average of 55.97. As you can see, further weakness ensued and we were able to cover half at the lows of 55.58 and scale out the rest around the .65 area, netting us an average profit of 0.33 on the whole trade, all within the context of one hour.

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

Below is a summary of all trades that MTG entered and exited during the week of December 1 - 5, 2003. Note that, as of December 1, the trading stats for the Intraday Real-Time Room now reflect a cash account of $50,000, as opposed to the $25,000 that was previous used. This change was made to more accurately reflect the size of a typical trader's account. More details on how we calculate our position size for Real-Time Room trades can be found by clicking here. 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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