Stocks gapped higher out of the starting gate last Friday morning, but resistance of the S&P 500's 200-day moving average immediately reversed the opening momentum. The major indices subsequently drifted gently lower throughout the day before finishing with mixed results. Despite giving up about half of its opening gain, the S&P 500 still ticked 0.8% higher. The Dow Jones Industrial Average similarly gained 0.5%. The small-cap Russell 2000 and S&P Midcap 400 indices rallied 0.2% and 0.7% respectively. Each of the main stock market indexes closed in the bottom third to half of their intraday ranges.

Turnover swelled across the board, causing the Nasdaq Composite to register a bearish "distribution day." Total volume in the Nasdaq grew by 17%, while volume in the NYSE surged 40% above the previous day's level. The higher volume gain in the S&P technically counted as a bullish "accumulation day," but the weak intraday price pattern more closely resembled selling into strength than institutional buying. Advancing volume in the NYSE exceeded declining volume by nearly 3 to 1, a firmly positive spread. The Nasdaq adv/dec volume ratio was negative, but only by a margin of 3 to 2.

The U.S. dollar finally began to strengthen last week, causing a pullback in the CurrencyShares Euro Trust (FXE), which mirrors the price of the euro/dollar. For the first time since the current parabolic uptrend began in early September 2007, FXE closed below support of its 20-day EMA. This means we may see further strength in the dollar this week, which could lead to FXE correcting down to support of its 50-day MA. The daily chart of FXE below is a great example of how well the 20-day EMA provides support in steadily trending stocks and ETFs. Until last Friday, notice how every touch of the 20-day EMA immediately led to a resumption of the strong uptrend:



Advanced traders capable of managing quick short sales may consider a trade to take advantage of near-term downward momentum in FXE. However, whenever a stock or ETF is trading above its 50-day MA, upward reversals in the direction of the primary trend can be sudden and swift.

In last Friday's commentary, we discussed the relative strength in the Biotech Index ($BTK), as well as a few of the Biotech ETFs. On a similar note, we've noticed a lot of relative strength in the broader healthcare sector, as well as the primarily large-cap Pharmaceutical Index ($DRG). While the major indices are still well off their October highs, the Pharmaceutical HOLDR (PPH) has already recovered back to test its October high. A rally above last Friday's high will cause PPH to break out above its prior high, triggering a potential buy entry for at least a short-term trade. The target would be resistance of the 52-week high, which was set back in May. The setup is illustrated on the weekly chart of PPH below:



Now that the Fed has given the impression of another rate cut at its December 11 meeting, it will be interesting to see how well the market retains last week's gains. Recent interest rate cuts have generated positive knee-jerk reactions in the market that quickly faded. Given last week's impressive bounce off the lows and rally into key resistance levels, a mild pullback this week would not surprising. But in order for the current rally attempt to have legs, the major indices should not retrace more than about one-third to one-half of last week's gains. If a retracement deeper than 50% occurs, overall momentum could quickly shift back to the downside. We approach the new week with a slightly bullish near-term bias, keeping in mind that the long-term downtrends remain intact.

Open ETF positions:

Long - IDU
Short - (none)

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and Morpheus Trading Group, a trader education firm launched in 2001 that provides daily technical analysis of the leading ETFs and stocks. For a free trial to the full version of The Wagner Daily or to learn about Wagner's other services, visit MorpheusTrading.com or send an e-mail to deron@morpheustrading.com.