Persistent selling throughout yesterday's session fueled a steady intraday downtrend that caused several of the broad-based stock indexes to break key technical support levels. After gapping lower on the open, the equities markets headed south and never looked back. The Nasdaq Composite tumbled 2.3%, the S&P 500 1.5%, and the Dow Jones Industrial Average 1.3%. The small-cap Russell 2000 fell 2.0%, as the S&P Midcap 400 lost 1.7%. Like the previous day, all of the major indices closed at their intraday lows.

Higher volume accompanied yesterday's sell-off, causing both the S&P 500 and Nasdaq Composite to register a bearish "distribution day" indicative of institutional selling. Total volume in the NYSE swelled 13% above the previous day's level, while volume in the Nasdaq edged just 2% higher. Since last week's peak, the Nasdaq has already flashed three days of institutional selling. The S&P has twice declined on higher volume. Aside from recent breaks of pivotal support levels, the stock market's price to volume relationship alone has turned bearish rather quickly. Until we begin seeing higher volume gains ("accumulation days") again, it remains risky to trade against the negative institutional money flow that is plaguing the market.

As per the plan discussed in yesterday morning's Wagner Daily, we covered our short position in the iShares Xinhua China 25 Index (FXI) immediately after the market opened. The end result was a realized gain of nearly 18 points for just a five-day holding period. FXI subsequently moved lower throughout the session, eventually hitting our original price target of the prior significant low from November 21. The dashed horizontal line on the daily chart below illustrates this:



Keep an eye on the StreetTRACKS Gold Trust (GLD) in the coming days, as it is poised for a volatility expansion and breakout from its "wedge" formation. This "wedge" is illustrated on the daily chart of GLD:



When the wedge is descending from the high, as is the case with GLD, it is considered a bullish pattern that usually resolves itself to the upside. Further, the 50-day MA has risen up to meet the price of GLD. Since it is the first touch of the 50-day MA in many months, support of this key moving average should also assist GLD in moving higher. But even if the 50-day MA and descending "wedge" pattern fail to push GLD higher, a downside breakdown below the 50-day MA and lower boundary of the wedge should be equally tradeable. The "wedge" pattern is not designed to predict the direction of the trend as much as it merely gives a heads-up on the likelihood of a strong move in one direction or the other. Therefore, you may wish to keep your finger on the trigger for a potential entry in GLD, trading in whichever direction the eventual breakout resolves itself.

The most damaging aspect of yesterday's sell-off was that the S&P 500, Dow Industrials, and Nasdaq each sliced through vital support of their "swing lows" from December 4. As mentioned in yesterday's commentary, a firm close below the December 4 low in any of the major indexes causes a "lower low" to be formed on the daily chart, thereby signifying the end of its current uptrend off the November lows. The subsequent formation of a "lower high" from the December peak will confirm the resumption of its intermediate-term downtrend that began in October. The Nasdaq's break of the December 4 "swing low" is shown on the daily chart below. Notice how the index also plunged below its 200-day moving average again:



In addition to the Nasdaq Composite, the Dow Industrials also moved back below its 200-day MA yesterday. The S&P 500 already did so last Friday. With each of the "big 3" benchmark stock indexes below support of their prior "swing lows" and their 200-day MAs, the technical outlook for the overall market is not encouraging. The price action in leading growth stocks, another barometer of the broad market's health, has also been negative. Many leaders such as Apple (AAPL), Intuitive Surgical (ISRG), and Baidu.com (BIDU) have begun failing their recent breakouts. Google (GOOG), for example, has already moved back to its 50-day MA, closing just below it yesterday.

A positive reaction to earnings reports from Goldman Sachs, Bear Stearns, or Morgan Stanley in the coming days could potentially stop the market's slide in the near-term. However, many of the main stock market indexes are in the process of completing the "right shoulders" of bearish "head and shoulders" patterns on their long-term weekly charts. With the weekly charts holding more bearing than the shorter-term daily charts, it could be a rough start to 2008, especially if prices follow through below the "necklines" of those patterns. We will take an annotated look at those weekly "head and shoulders" patterns in tomorrow's newsletter.

Open ETF positions:

Long - PPH
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.