As anticipated, stocks showed indecision on the last trading day of the year, but the bears won in the end. The major indices sold off in the morning, recovered to near the flat line in the afternoon, then dropped back to their morning lows in the final thirty minutes. The S&P 500 lost 0.7%, while both the Nasdaq Composite and Dow Jones Industrial Average slid 0.8%. The small-cap Russell 2000 declined 0.7%, as the S&P Midcap 400 fell 0.6%. All the main stock market indexes closed at their worst levels of the week. Each index also finished 2007 below its respective 50-day moving average.

Turnover rose across the board, causing both exchanges to register a bearish "distribution day" on the final day of the year. Total volume in the NYSE increased 6%, while volume in the Nasdaq increased 4%. Although the higher volume was indicative of institutional selling, trading again remained below average levels. We're placing little emphasis on the market's daily price to volume relationship until volume begins returning to "normal" levels after the holidays.

As we enter the new year, it's a good time to take a look at the "big picture" of the longer-term weekly charts of the major indices. Doing so is a good way to eliminate the noise from the shorter-term daily charts. Below is a weekly chart of the S&P 500:



First, notice the "head and shoulders" pattern that we discussed a few weeks ago is still intact. The right shoulder is nearly formed. A breakdown below the neckline should send the S&P down to major support of its multi-year uptrend line, presently around the 1,370 level. Curiously, that also coincides with support of the August, 2007 low. Within the first several months of 2008, we feel there is a good chance the S&P will follow through on its "head and shoulders" pattern and fall to support of the long-term uptrend line.

The Nasdaq Composite has a similar pattern on its weekly chart, although the uptrend line is tighter. A test of the November, 2007 low will coincide with support of the weekly uptrend line. A breakdown to the August low would cause the anchor point of the weekly chart to be adjusted lower:



After we see how the market gets started in the new year, we'll take a more detailed look at the other main stock market indexes tomorrow. We'll also re-assess which sectors and industries showing the most relative strength and weakness.

Open ETF positions:

Long - GDX
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.