The Wagner Weekly
September 22, 2003

Weekly ETF Snapshot

I want to shift gears and discuss something we rarely speak of -- monthly charts. Although the time frame of monthly charts is too long to provide you with guidance for any detailed entry or exit points on multi-day "swing" trades, this time interval is very important in understanding the "big picture" of what is really happening in the markets. As you know, the longer the time interval of a chart, the more bearing or weighting that it provides with regard to market direction. For example, an hourly chart is more powerful than a five-minute chart, a daily chart is more important than an hourly chart, a weekly holds more weight than a daily chart, etc. As such, it is crucial to always utilize what I refer to as a "top-down" approach to analyzing the markets rather than a "bottom-up" approach. This simply means that I always begin my analysis by looking at the longer time frames and then subsequently narrowing the time intervals down to less significant levels. Doing so will occasionally cause me to miss a small move in a particular direction, but will always enable me to be trading on the correct side of the market with regard to the "big picture." On the other hand, having a "bottom-up" approach to the markets will cause you to catch many small day-to-day moves, but will often cause you to be fighting the greater trend of what is really happening. This, consequentially, prevents you from catching the big moves that could earn you very large chunks of cash that would otherwise be earned through focusing on the "big picture." If you look at the most successful traders and money managers you can think of, they all have one thing in common: they catch the big moves in the market and don't worry about the day to day gyrations. This is not, of course, to say that day trading is not a good thing. But, my view is that day trading is simply the "icing on the cake" that enables you to generate monthly cash flow, while catching the big multi-month moves build your equity and personal net worth. Now that you understand why a focus on monthly charts is very important, let's take a look at a monthly chart of the Dow Jones Industrial Average, starting with the the low of the year 1990. Commentary on the chart's annotations is below the chart:



The first thing you will probably notice about this chart is that the Dow is up against its 40-month moving average (the purple line). Notice how resistance of this 40-period moving average marked the high of the Dow's last major rally, which ended in March 2002. You will also notice that the 40-period moving average converges with the downtrend line from the high of May 2001 (the red line). I personally feel this convergence will act as major resistance on the Dow in the coming months. More importantly, notice how the Dow is currently trading more than 3000 points above its primary uptrend line (the black line). The support of the primary uptrend line is currently around 6400. As such, I would not be surprised to eventually see the Dow head back down to support of that primary uptrend line in the coming year. If you took this a step further and applied Fibonacci to a monthly chart of the Dow, you will see that the index is trading near its 50% retracement level, which is typically a key area of resistance for a down trending index.

I know that some of you will look at this chart and want to justify the Dow's recent rally based on the improvement in economic fundamentals, corporate earnings growth, etc. However, I am simply presenting you with an unbiased view based purely on technical analysis, without regard to any fundamentals. But, fefore you start getting really bearish based on my monthly chart analysis of the Dow, remember the time interval you are looking at here is quite long! Each bar represents an entire month's worth of data. Therefore, it could easily take one to two YEARS before we see this happen. Another scenario is that the Dow could enter into a sideways trading range and correct by time, rather than sell off to new lows. A correction by time would enable the trend line to eventually rise up to meet the price of the Dow without the Dow dropping down to meet it. If you think about it, a correction by time would be worse for us than a sell off because it is more difficult to profit from a sideways market than by simply shorting a down trending one.

The above commentary was taken from the September 22 issue of The Wagner Daily, which is e-mailed to our subscribers every morning before the market opens. 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! Click here to receive a free trial to MTG's services (limit one per household).

Sector Notes:

Several industries posted new highs last week, along with the broad-based ETFs. Sectors that set new highs are: BDH (Broadband), BBH (Biotech), HHH (Internet), SWH (Software), XLF (Financial), and WMH (Wireless). TTH (Telecom) made it through to the ascending list on the heels of the technology influenced move last week. NEM (Newmont Mining/XAU) is showing strength for the first time after landing on the ascending list recently. Bonds remain stable and show no signs of weakness on the ascending trend. New highs for several international ETF were established, but no changes in trends were triggered. International ETFs making new highs are EWA (Australia), EWC (Canada), EWJ (Japan), EWG (Germany), EWZ (Brazil), and EWW (Mexico). Check the newly updated MTG Sector Trend Trigger List for more detailed information. Looking at the list, the bulk of all the sectors are ascending, therefore, we will be continually monitor for signs of reversals and a repopulation of the descending lists.

Below is EWA, the most recent addition to the international ascending list. Note the immediate draw down after the trigger (green up arrow) and consequent move after the first day making higher daily highs. Also notice the nice higher swing highs and swing lows, defining the new ascending trend.



The new changes and trigger levels to all the ETFs we follow are updated in the this week's MTG Sector Trend Trigger List, which is currently free for all to view. Remember that you can now click on the link for each ETF on the list and instantly see current, annotated charts of each ETF! Check it out by clicking 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:

Diversification is made easy using ETFs, especially when we are dealing with bonds and international issues. If Latin America is strong or Asia is weak, it’s easy to participate. Bond is weak, then short it. Now there's a trade never done before in a regular brokerage account! Liquidity and wide spreads are still issues in some of these ETFs, but the situation can only improve as these tickers become more popular domestically and internationally. The highest volume ticker is an ETF, so other ETFs should naturally be noticed more. ETFs are ideal for those who like the hands on approach to balance their own portfolio, and don’t want to follow the performance minute by minute. The basket of stocks they hold offers diversification within the sector and price smoothing. These “mutual fund” style characteristics is perfect for longer holding periods, thusly, a trend following approach, which tracks the footprints of money in an auction market, is one of the best ways to follow ETFs.

Deron Wagner
MTG Founder and President

Chris Chang
MTG Associate Editor

Weekly Reality Report

Below is a summary of the performance of each MTG trade that was closed during the period of September 15 - 19, 2003. Open positions are not reported until the week they are closed. The stats below represent combined net results from trades we participated in, as called in The Wagner Daily and ETF Real-Time Room:

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.

Yours in success,

Deron M. Wagner
Founder and President

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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