The big picture is unchanged

August 11, 2006
Deron Wagner

Stocks attempted to bounce off of
Wednesday’s weakness yesterday, but the rally failed to gain momentum.
Nevertheless, the broad market closed a bit higher. The Nasdaq Composite gained
0.6%, the S&P 500 advanced 0.5%, and the Dow Jones Industrials rallied 0.4%. The
small-cap Russell 2000 and S&P Midcap 400 were higher by 0.8% and 0.6%
respectively. Each of the major indices finished near their intraday highs, but
still recovered less than half of yesterday’s trading ranges.

Turnover decreased across the board yesterday, which failed to
confirm the positive price action. Total volume in the NYSE dropped off by 7%,
while volume in the Nasdaq was 16% lower than the previous day’s level. When
stocks advance in a generally weak market, a gain on higher volume indicates
that institutional buying interest has returned. But unfortunately for the
bulls, we have yet to see such a scenario. Market internals were positive in
both exchanges, but by less than a 2 to 1 margin.

Yesterday, a subscriber e-mailed us with a question regarding
our trade management of the iShares Silver Trust
(
SLV |
Quote |
Chart |
News |
PowerRating). This person was
wondering why we still held on to our SLV position after retracing three points,
as opposed to selling it into strength of a ten point gain the previous day.
Since we figured that a few others may be wondering the same thing, we decided
to answer the question publicly in this column.

When swing trading, there are basically only two ways to
manage your positions. The first method is that you play only the quick moves
and sell into strength of a move rather than trailing your stop. With this
style, you are generally in and out of a trade within a few days and would
indeed focus on taking a profit anytime the trade shows a gain of more than 2 to
1 of the initial amount of the risk. The benefit of this style is that there is
less risk of a pullback, but the downside is that your profit potential is
always going to be limited.

The second method is that you take a trending stock or ETF
with the intention of holding through natural pullbacks (corrections) within the
context of its trend. Doing this requires patience and discipline, but the
profit potential is much larger. As regular subscribers may have noticed, SLV is
still well below our target price, but we certainly did not expect it to rally
right to our target price without a few healthy corrections along the way. Even
the strongest of stocks or ETFs never go straight up without taking a break.
Pauses are natural along the way and we generally will sit through those, just
as long as the trend remains intact. We correspondingly trail our stops each
time an ETF rallies above the prior high after a correction (or drops below
prior low when short). This is how we are managing SLV, and is also the way we
generally manage most positions. How can one ever expect to achieve a potential
10-point gain in the first place if not willing to hold through a correction.

Most importantly, we want to say that you are always
encouraged to make your own decisions as to when to take profits on a position!
If we are holding a stock longer than you are comfortable with, then we strongly
recommend you close the position and feel good about it! A trader must be
comfortable with his or her own style, so there is nothing wrong with closing
out a trade before we do. We’re simply holding for the next swing back up, but
it doesn’t mean you are required to do so. When a trader follows a system that
suits his or her personality, it is always the first step to consistent
profitability.

Looking at the daily charts, yesterday’s action did little to
change the technical picture of the broad market. The S&P 500 recovered to close
back above its 200-day moving average, but only by a nominal amount. Our bias
going into today remains neutral on the short-term, but bearish on the
intermediate-term. In the near-term, we may continue to see a lot of choppy and
indecisive action as the bulls and bears battle it out. The past few days of
choppy intraday action are indicative of this. But in the intermediate-term, one
can only conclude that the broad market remains in a steady downtrend. Until the
downtrends in the major indices are broken, along with the confirmation of
higher volume, there is no reason to get excited right now. Consider trailing
stops tighter on your short positions, and monitor a list of potential long
positions, but we basically consider the market to be in a holding pattern right
now.

Open ETF positions:

Deron Wagner is the head trader of
Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com),
which he launched in 2001. Wagner appears on his best-selling video, Sector
Trading Strategies (Marketplace Books, June 2002), and is co-author of both The
Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader
(McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and
Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and
financial conferences around the world. For a free trial to the full version of
The Wagner Daily or to learn about Deron’s other services, visit
morpheustrading.com or send an e-mail to deron@morpheustrading.com .

The big picture is unchanged

BUY THE FEAR, SELL THE GREED

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