The Wagner Weekly
December 15, 2003

Weekly ETF Snapshot

Not surprisingly, the broad market gains from the "Saddam Rally" faded quickly yesterday morning as traders sold into the strength of a large opening gap. The major indices drifted lower throughout the morning session and gave back all their gains by mid-day. The downtrend that began in the morning subsequently continued throughout the afternoon and each of the major indices closed with losses and at their intraday lows. However, Wagner Daily subscribers were warned against blindly buying the market just because of the Saddam news yesterday morning. Once again, the Nasdaq Composite showed the most weakness and lost 1.6%, while the Dow showed the most relative strength and only closed 0.2% lower. The broader-based S&P 500 Index closed 0.6% lower than the previous day. The Semiconductor Index ($SOX.X) was one of the hardest hit sectors and lost 2.8%. As you may recall from last week's discussion, the SOX has really been showing a lot of weakness lately and its daily chart is looking more and more bearish. Because the Semiconductors are so heavily weighted, the Nasdaq usually follows the SOX, and the rest of the market usually follows the Nasdaq. So, keep an eye on the performance of the SOX index in the coming days as an indicator to near-term market direction.

Adding to yesterday's bearish price reversal was the fact that total market volume came in 25% higher than Friday. This makes the third bearish "distribution day" for the NYSE within the past two weeks and the fourth one for the Nasdaq. While a bull market can sustain one or two days of lower closing prices on higher volume, things start to get pretty shaky when you begin to see three or four of these within a short period of time. As we always say, volume does not lie and it has the added benefit of showing you what's really happening beneath the surface, even though some charts may appear bullish at first glance.

When I was a new trader, I did not understand the importance of having a firm set of rules in place for dealing with opening gaps, but I soon learned the hard way that it was a very important aspect of becoming successful. Simply put, a "gap" is the difference between an index's closing price and the next day's opening price. The Nasdaq Composite, for example, "gapped up" 29 points yesterday morning because the index closed at 1949 last Friday, but opened at a price of 1978 yesterday. This correspondingly represented a 1.4% opening gap. Because most amateur investors have a "follow the herd" mentality, many people will blindly buy a large opening gap up or sell a large gap down due to fear of missing "the next big move." While this is occasionally effective, many opening gaps fail to remain intact because large-scale professional and institutional traders often use gaps as an opportunity to either unload or accumulate positions (depending on the direction of the gap). When you trade in the opposite direction of a gap, this is known as "fading" the gap. In the case of yesterday, professional traders sold into the strength of the opening gap ("faded the gap") in order to sell their long positions and initiate short positions at the best possible prices. The end result of failed opening gaps is that the average retail investor or amateur trader is left holding the bag. However, by following a firm set of rules for managing and trading gaps, you not only avoid getting stuck, but can profit from "fading" the gaps right along with the pros. To assist you with this, we have designed the MTG Opening Gap Rules, which we recommend you review at your convenience if you have not yet done so.

In a nutshell, the MTG Opening Gap Rules mandate that we only buy a large opening gap after the stock or index rallies to a new high after the first 20 minutes of trading. Conversely, we would only short a large opening gap down if the stock or index breaks down to a new low after the first 20 minutes of trading. Waiting 30 - 40 minutes for confirmation of a new high or low is even safer. In the case of a gap up, if the index fails to make a new high after the first 20 - 30 minutes of trading, we simply do not buy. In fact, we typically "fade the gap" and initiate short positions if the index or stock makes a new low after the first 20 - 30 minutes. If you followed the Morpheus rules for managing gaps, as we advised in yesterday morning's Wagner Daily, you stayed out of trouble yesterday because we never received a buy signal in any of the major indices. Not a single one of the indices made a new high after the first 20 minutes and their respective opening prices marked the high of the day. From that point, the broad market entered into a steady downtrend that eventually caused each of the major indices to close with losses. If you sustained losses from buying the opening gap up yesterday, chalk it up as tuition and a lesson learned. By implementing a strict set of rules for managing gaps in the future, you will consistently avoid substantial losses and even profit by not following the herd of lemmings over the edge of the cliff.

Our single most profitable trade last week was a short in Beazer Homes (BZH), which we initiated on December 5 and closed on December 10. Within a several day period, we netted a 4-point gain in this stock because we took advantage of a technical breakdown in the Home Builder sector ($DJUSHB). There is not currently an ETF that tracks the index, but every major Home Builder stock sold off sharply, and on high volume, last week. Although the Dow Jones U.S. Home Builder Index ($DJUSHB) dropped 4.2% last Tuesday, it got whacked even harder the next day and lost an additional 5.3%. That totals nearly a 10% drop in just two days! However, given the huge gains the index has seen over the past year, it should not be surprising to see such a sharp drop. The more parabolic the rally, the faster and harder it will drop when it corrects. The key, however, is to wait for confirmation of a correction and not trying to short a top because that is a dangerous game to play with any stock or index. That's why we waited until after the index showed steep losses on Tuesday before we presented the idea of shorting it in the December 10 newsletter. Taking a look at the daily chart of the index below, notice that it closed below its 50-day moving average (for the first time since September 10). Also note the big volume spike, which confirmed the weakness:



Right now, we feel the most important technical chart to be aware of right now is that of QQQ (Nasdaq 100 Index) below:



For the first time since the current primary uptrend began in March, the 20-day moving average has crossed down below the 50-day moving average. This technically signals a possible reversal in the current primary uptrend that has been intact for nine months. Confirmation of this reversal would occur if the prior lows from December 10 are broken. If that happens, it will be the first "lower low" that was set since the current rally began. Combined with the bearish moving average crossover, that would likely trigger program selling in the Nasdaq. Therefore, while the Nasdaq has been quite choppy lately, it is beginning to look like we may see some resolution out of the congestion of the past several months. We will be looking to short QQQ, and possibly other broad-based ETFs, on the first break of a prior low on the daily charts. For now, we are extremely cautious against being long anything other than commodity-based ETFs or sectors such as Gold. Many good short setups are starting to present themselves and we will look to enter some of them with a little more price confirmation.

Finally, many of our subscribers have been asking about the anticipated launch date for a U.S. ETF that invests in Gold. While the launch of such an ETF, which will go by the ticker GLD, is currently in the process of getting past regulation, a new ETF that invests in gold bullion was launched on the London Stock Exchange this week. On its first day of trading, December 9, approximately 8.2 million units representing 820,000 ounces of gold worth US$334 million were traded on the London Stock Exchange and in the secondary market. Click here to read the complete article detailing this launch in London.

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:

Each sector category had a primary trend reversal last week, based on the pivot levels listed in this week's MTG Sector Trend Trigger List. OIH (Oil Service HOLDR) is now in the ascending list and above $60.40. Also, SMH (semiconductors) formed a swing low and has a new trend reversal trigger price. IGN (Networking) and BDH (Broadband) both dipped into the descending list, but have rallied with the rest of the market to end the week. SHY (1-3yr T-Bond) returns to join the other bond ETFs on the ascending list. All the bonds are now ascending, but it has been quite a rocky ride so far. EWH (Hong Kong) climbed back to the ascending list and is challenging the highs for the year.

Below is the daily chart of XLE (energy). It has been on a steep ascent and broke through a major high in June. Currently, XLE has gained over 11% since landing on the ascending list in August. Notice that it has not been below the trend reversal trigger price throughout the run. This means you could have bought XLE when MTG first listed it on the ascending trend list of the MTG Sector Trend Trigger List in August, and you would still be long with an 11% gain:



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:

You, as a trader, are always at the mercy of price action, and price action is always based on traders' and investors' perception of value. Eventually, you end up back where we started, back to being a trader or investor making trades that starts the price action moving. You are trading amongst yourself and are your own weakest link. Sometimes it may seem like you are stuck in an endless loop. Here is our gift to you this season, which, ironically, you have to give to yourself. You should find another set of eyes, a mentor, a team like MTG, your spouse (better take that back), or someone who can get you on the right path. If you are already on the path, they can help keep you there. MTG evaluate trades using a mix of technical analysis information, such as trend lines, support/resistance, relative strength, etc. We engage in all multiple trading styles, from day to swing and even longer. You are always free to e-mail any one of us to ask questions. We think the operative word here is free.

Deron Wagner
MTG Founder and President

Chris Chang
MTG Associate Editor

Weekly Real-Time Room Report

Although ranges in the broad market remained tight, the Intraday Real Time Room notched another profitable week. MTG traded rather lightly last week, making only 12 official daytrading calls during the entire period. Of these 12 trades, 7 were winners and 5 were losers. Although the Real-Time Room typically makes around 13 - 20 intraday calls per week, last week's performance was an excellent example of how Morpheus utilizes discipline and patience to prevent overtrading when market conditions are not ideal. The Morpheus intraday relative strength style of trading has proven itself to be consistently profitable, regardless of broad market conditions. However, as we are fond of saying in the Real-Time Room, you are better off not trading at all when the broad market is not showing its hand. With the market making many unexpected intraday reversals last week and the Dow flirting with the psychological resistance of 10,000, last week's curtailed intraday activities were a lesson in the type of composure that is necessary to be a consistently profitable intraday trader.

Intraday Real Time Room Play of the Week:

In possible anticipation of a bullish reaction to the Fed's comments last Tuesday, the $BKX (banking index) was set ablaze by traders on Monday, December 8th and almost all banking shares were up sharply. Because MTG is always on the lookout for sectors showing relative strength, a quick scan turned up the following trade in Citibank (C) from the long side:



As you can see, Citibank quickly advanced within the first 15 minutes of trading on higher than average volume. Consolidating those gains were a signal to get long going into the first reversal period. Our entry was in the lower black circle at the 46.93 level. A full position was taken and was scaled out, with the last piece being sold at 47.11, just as Citibank was coming into its 200 ma resistance above. As we teach our traders every day in the Intraday Real Time Room, the 200 period moving average on any timeframe has the power to stop most advances or declines dead in their tracks, and is often a useful target or stop loss point for intraday trading.

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 8 - 12, 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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