The Wagner Weekly
February 24, 2003


The HOLDR Indexes

One thing you will notice when trading the HOLDRS such as BBH, SMH, and OIH is that the bid/ask spreads vary greatly depending on the price and average daily volume of each HOLDR. For example, SMH, which is priced in the $22 range and normally trades over 8 million shares per day, typically has a much tighter spread than RTH, which trades near $70 and has an average daily volume of only 600,000 shares. While a wide spread is not necessarily a problem if you use limit orders, it is sometimes difficult to know exactly what limit price to use in order to ensure you are paying as close as possible to the actual fair value of the HOLDR based on the sum of the underlying equities. For this reason, it is very helpful to closely monitor each HOLDR's respective index.

Just like each individual stock belongs to at least one market index, each of the HOLDRS also have an index that closely mirrors the price of the HOLDRS. In fact, the index of each HOLDR is comprised of exactly the same components as the HOLDR itself. Therefore, the index will always give you a true representation of the actual value of each HOLDR, even if the spread is wide and liquidity is thin for the HOLDR. The table below lists each of the sector HOLDRS and their respective indexes:



Keep in mind that your trading software may require you to enter a different symbol in order to view the indexes. With RealTick, for example, you need to enter "$IBH.X" (without the quotes) in order to view the Biotechnology HOLDRS Index. Check with your data provider if you are unsure about how to view the indexes listed above.

MTG Sector Snapshot

Broad market trend commentary:

The DIA and SPY developed a swing high formation last week. Note the ellipses are placed in the charts below. We will expect a trend change when prices break above these levels. The ellipse is the second anchor in the trendline, which can act as a stop when trading. Using a signature of 5 bars shaped like an upside down V identifies a swing high. These five bars are arranged such that the first and second bars have higher highs and higher lows compared to the third bar. The forth and fifth bars have lower highs and lower lows than the third bar. Not all formations cooperate so well, and are sometimes much harder to spot. Do you see how QQQ is different? If the QQQ significantly retest the lows, then we'll pick out the high in the last 4 bars as the swing high/second anchor. Keep in mind, there is quite a bit of resistance where the last trend change took place; the price level where the red down arrows are placed. True to form, the QQQ is trading above that level and is in the trading range that has been in place for the last several months. Again, QQQ is exhibiting relative strength.

The major indices:

(Please consult the Sector Snapshot Glossary for help in understanding the chart annotations below)








Sector Notes:

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

Some interesting sector movement occurred again last week. Biotech, IBB, oil and networks made the ascending list. Yes, the ascending list. Some may read this as "defensive", but at least these are the first ones moving in the counter direction. We also spotted the 20 yr bond TLT, switching to the descending trend. Don't read into this too much because we are identifying this ticker as being choppy. It's basically directionless the last 6 months, as indicated in the chart below:



Closing Thoughts:

Your exit strategies determine the outcome of your trades. Shift your focus and learn several exit tactics and be absolutely clear on how you will use them BEFORE you enter any trades. You have to know how the play the game before you win, right?

Chris Chang
MTG Associate Editor

Weekly Reality Report

Last week was shortened due to the markets being closed for the holiday on Monday. When the market finally did open, it was much of the same low-volume, non-committal trading action we have been seeing for the past month. Nevertheless, we squeaked by with a net profit again due to precise position management.

Below is a summary of the performance of each MTG trade that was closed during the week of February 17 - 21, 2003. Any open positions are not reported until the week they are closed.

Trades from The Wagner Daily:

Trades from the ETF Real-Time Room:

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

I am headed off to the Big Apple tomorrow to speak about ETF Trading at the Online Trading Expo. on Thursday. If any of our subscribers will be attending the show, drop me an e-mail and we will try to get together. Click here for more details on my presentation.

We just wrapped up a mini-lesson that was conducted live in our ETF Real-Time Room. We had a big turnout and have received some very positive feedback. In case you missed it, we have recorded the transcript and will make that available for you next week.

After reading the February 3 issue of The Wagner Weekly, many of you e-mailed us requesting a copy of the MTG trading plan that was better formatted for easier printing. To meet your requests, we have placed the MTG trading plan online in your choice of easily downloadable formats. If you have Microsoft Excel installed on your PC, download the Excel version by going to: www.morpheustrading.com/tradingplan.xls. If you do NOT have Microsoft Excel, you can download the Adobe Acrobat PDF version of the file by going to: www.morpheustrading.com/tradingplan.pdf. Please note that these URLs are NOT accessible through the MTG web site, so you need to manually access the links from within this e-mail.

We have received numerous requests for an actual screenshot of our trading layout that is used each day. To meet your requests, we have uploaded this image to our web site and it is accessible by going to www.morpheustrading.com/screenshot.jpg. Please note that you may need to scroll both horizontally and vertically in order to see the entire image because we use a 3-monitor setup. Internet Explorer may also require you to click the icon on the bottom right of the image to expand to its full size. The image is about 800k, so those of you on a dial-up connection may need to be patient while it is loading. Those of you that are familiar with graphics editing software are welcome to modify the size, but we did not want to change the size of the image for concern of not being able to see the chart details. We will be writing an article that explains our chart setups in the near future, but you can browse the image in the interim. Beware, you may be surprised by how simple we keep the technical analysis of our charts!

We want to make all of you aware of a discussion thread that Morpheus has started on Elite Trader, a professional online discussion forum for equities traders. It is free to both browse and post messages as long as you register with the site (which is free). The ETF trading discussion thread can be found by searching for the title "Why Actively Trade ETFs?" or by clicking here. You are welcome to use this discussion thread to post your questions and comments about ETF trading because it is a great way for Morpheus to keep in touch with clients and learn from each other as well.

I'm excited to announce the national publication of some new educational trading articles I recently wrote for two magazines. The first article, entitled "Short-term Sector Trading With ETFs," can be found on page 52 of the March issue of Active Trader magazine. The second article, entitled "Navigating Choppy Sideways Markets," begins on page 11 of the February issue of SFO (Stock Futures and Options) magazine. Both issues are now on sale at your favorite newsstand.

As always, thanks for spreading the word about Morpheus Trading Group!

Deron M. Wagner
Founder and Editor

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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Charts from RealTick (www.realtick.com)