Stocks got off to a shaky start yesterday morning, but the Nasdaq bulls showed their holiday spirit into the close. After gapping higher on the open, the major indices drifted lower throughout the morning, sending the S&P and Dow to test the previous day's lows and the Nasdaq to unchanged. Afternoon buying interest in the tech arena reversed the early weakness and sent the Nasdaq Composite 1.5% higher. The S&P 500 and Dow Jones Industrial Average lagged seriously behind, though still managed to gain 0.5% and 0.2% respectively. Small-caps kept pace with the Nasdaq, propelling the Russell 2000 Index 1.5% higher as well. The S&P Midcap 400 rallied 1.2%. The S&P 500 and Nasdaq Composite both finished at their best levels of the day, while the Dow finished in the upper third of its range.

Trading activity picked up 6% in the Nasdaq, enabling the exchange to score its second bullish "accumulation day" this week. Total volume in the NYSE was 2% lighter than the previous day's level. Not surprisingly, turnover in both exchanges remained below 50-day average levels. With volume so light over the past week, it seems a lack of sellers, as opposed to an abundance of buyers, is the biggest factor behind the Nasdaq's gains. When this occurs, one must be extra cautious because a single day of institutional selling can wipe out many days worth of gains. Still, market internals in the Nasdaq were solid, with advancing volume beating declining volume by 3 to 1. The NYSE adv/dec ratio was only fractionally positive.

If yesterday's rally quickly fizzles out, one sector that may be setting up for potential short selling is the Oil Service Index ($OSX). On December 17, the $OSX sold off sharply, simultaneously breaking support of its one-month uptrend line and 50-day moving average. Over the past few days, the index has attempted to recover, but closed yesterday right at new resistance of its 50-day MA. Remember that a prior support level becomes the new resistance level after the support is broken. As such, the prior uptrend line will also act as resistance just overhead. The daily chart of the $OSX below illustrates the recent action:



With this type of pattern, it's crucial to wait for a break of the prior day's low before attempting any short sales. Otherwise, the risk is too great that the index will pop back above its 50-day MA and rip back to its prior high. Waiting for a break of the prior day's low confirms the failure of the recovery, which enables the downward momentum to more easily resume. The Oil Service HOLDR (OIH) is the ETF that most closely follows the $OSX index, but it actually closed above its 50-day MA yesterday. A break of yesterday's low in OIH puts it back below it. Although this setup has decent potential if it triggers below yesterday's low, we must reiterate yesterday's comment that cash remains the best option throughout the low-volume holiday period. Further, the sister Oil Index ($XOI) is actually looking bullish and could pull the $OSX along if it rallies to a new high. Only nimble, short-term traders should consider this trade.

Over the past several days, the S&P has been forming a "bear flag" formation on its daily chart. It has done so by sloping modestly higher from the December 11 to 17 sell-off. If it breaks below yesterday's low, the lower channel of the "bear flag," odds are high that downside momentum will send it significantly lower. However, the same can not be said of the divergent Nasdaq.

Yesterday's relative strength shoved the Nasdaq back above its 200-day MA. The index has also retraced nearly 50% of its loss from the December 11 peak. Nevertheless, a lot of overhead supply remains, as well as resistance of the 61.8% Fibonacci retracement. We view the Nasdaq as now being in "no man's land," trapped between key support of its 200-day MA and a significant amount of horizontal price resistance. The latter is illustrated on the hourly chart of the Nasdaq below:



Research in Motion (RIMM), manufacturers of the almighty Blackberry phone, announced a strong quarterly earnings report after yesterday's close. In the after-hours market, the stock was trading more than 10% higher. This could have a positive impact on the Nasdaq today, but let the buyer beware; most rally attempts in leading stocks have lacked momentum lately. Relative weakness in the S&P and Dow doesn't help either. We still suggest sitting out the remainder of the year, writing or re-writing your 2008 master trading plan discussed in yesterday's commentary. The erratic behavior of stocks on "triple witching" options expiration today is another good reason to avoid new trade entries.

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.