Stocks wrapped up a strong week of gains with a quiet day of consolidation last Friday, closing slightly lower on lighter volume. The S&P 500 slipped 0.2%, the Nasdaq Composite lost 0.1%, and the Dow Jones Industrial Average was unchanged. The S&P Midcap 400 eked out a gain of 0.1% and the small-cap Russell 2000 declined 0.2%. It was the second straight week of solid gains since the major indices formed their near-term bottoms last month. For the week, the S&P 500 advanced 1.6%, the Nasdaq Composite 1.7%, and the Dow Jones Industrial Average 1.9%.

Trading in both exchanges slowed to its lowest level in months. Total volume in the NYSE was 12% lighter than the previous day's level, while volume in the Nasdaq dipped 6%. Not including the holiday-shortened session of November 23, turnover in both exchanges limped in at its lowest levels since early October. Institutional activity was clearly absent ahead of the weekend, and is likely to remain that way until the December 11 meeting on economic policy by the Federal Reserve Board. Echoing the nearly unchanged prices in the broad-based indexes, market internals in both the NYSE and Nasdaq were nearly flat.

The iShares Xinhua China 25 Index (FXI) may be in play in the coming week, as it closed last week at pivotal resistance of its 50-day MA. FXI began correcting from its stellar run in the beginning of November, and fell below its 50-day MA on November 9. On December 5, it popped back above its 50-day MA, but only held above it for two days before closing below the 50-day MA last Friday. Take a look:



If FXI manages to rally above its December 6 high, bullish momentum could emerge once again, quickly sending it to another record high. But if it falls below the December 7 low, it could just as easily enter into a rapid descent down to test its November low. If it cannot recover above its 50-day MA, the bulls who bought the breakout attempt last week will be trapped, leading to strong downward momentum that subsequently attracts short sellers. Conversely, a move above last week's highs will trap the bears who sold short the rally into the 50-day MA in anticipation of a resumption of the downtrend that began last month. Rather than predicting which way it will go, we are merely pointing out that a sharp move in either direction is likely to occur very soon. Whichever way it breaks, a decent trading opportunity on either the long or short side may present itself. As such, we will be monitoring FXI for potential entry in the direction of the momentum. Most likely, the tone of the U.S. markets this week will dictate whether or not the intermediate-term downtrend of FXI remains intact.

Breakouts to new highs among leading stocks have begun emerging once again, which is a positive sign for the stock market. However, most financial sectors have not yet reversed their sharp downtrends. Until we begin to see money flowing back into sectors such as banking and securities broker-dealers, we remain suspicious of how long the broad market's rally off the November lows can be sustained. Last week, we suggested monitoring the price action of the S&P Financial SPDR (XLF) as a proxy for the health of the overall financial arena. Specifically, we said that a firm close above its prior high from November 30 would represent a short to intermediate-term trend reversal. Last Friday, XLF briefly traded a few cents above the November 30 high, but closed well below it. This is illustrated on the daily chart of XLF below. Also, notice that the average daily volume of XLF is now over 80 million shares:



XLF formed its first "higher low" on December 4, but has not yet formed the subsequent "higher high" that is necessary to mark a reversal of its downtrend. Nevertheless, it's encouraging that XLF is back above its 20-day EMA. With XLF essentially being in "no-man's land," we have a neutral bias on the financial sector. This means the anticipated direction of the major indices in the coming week is also unclear.

Another highly anticipated Fed meeting is on tap this Tuesday. More speculation than usual exists as to whether or not the FOMC will make another reduction on interest rates or other changes to economic policy. As always, we expect the market to be relatively quiet leading up to the Tuesday afternoon Fed announcement, followed by erratic volatility immediately thereafter. Consider holding off on new trade entries until after the market has had a chance to digest the upcoming news. You probably won't miss much until then, and could very well save yourself capital and anxiety.

Open ETF positions:

Long - PPH, SLV
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.