The major indices wrapped up a choppy week with another indecisive session last Friday. After beginning the day substantially lower, stocks reversed to recover their losses by late morning, pulled back sharply at mid-day, then grinded their way back towards the flat line into the close. The Nasdaq Composite eked out a gain of 0.1% and the S&P 500 edged 0.2% higher, but the Dow Jones Industrial Average slipped 0.1%. Although the S&P Midcap 400 Index showed relative strength by climbing 1.1%, the small-cap Russell 2000 rose only 0.2%. The main stock market indexes settled in the upper quarter of their intraday ranges, but near the middle of their weekly trading ranges.

Turnover eased across the board, indicating traders preferred a slightly cautious stance ahead of the weekend. Total volume in the NYSE declined 12%, while volume in the Nasdaq receded 15% below the previous day's level. Trading in the Nasdaq dipped below 50-day average levels for the first time in seven sessions. Advancing volume in the NYSE exceeded declining volume by less than 3 to 2. The Nasdaq adv/dec volume ratio was fractionally negative.

In the September 12, 2008 issue of The Wagner Daily, we said, "For the first time this month, we saw some positive signs in yesterday's market action." We then stated the technical reasons we felt the broad market may be in the process of forming at least a short-term bottom. Specifically, on September 11, the major indices "undercut" their July lows and formed "bullish engulfing" candlestick patterns, a few sectors and individual stocks showed leadership for a change, and buying was broad-based and equally distributed. Although the main stock market indexes only closed near unchanged levels the following day (September 12), stocks again demonstrated positive price action by recovering from early morning losses. Going into the weekend, the overall technical picture was looking better than it had in quite a while. But just like the preceding weekend, major financial news released on Sunday means we're in for another highly volatile session today!

Going into the weekend of September 6 and 7, the main stock market indexes were poised for further downside after breaking key support levels on September 4. Then, on September 7, the Fed announced they were seizing control of mortgage giants Fannie Mae and Freddie Mac. The initial knee-jerk reaction caused several of the major indices to open approximately 3% higher on September 8, putting major pressure on the trend-following short sellers. Now, one week later, we have the exact opposite of last week's situation. After a bullish reversal on September 11, stocks entered this past weekend positioned for further upside in the near-term, but huge financial news once again hit The Street over the weekend. After failing to attract an emergency suitor and the U.S. government refusing to bail them out this time, the country's oldest investment brokerage firm, Lehman Brothers, is filing for Chapter 11 bankruptcy protection. Inverse of last Monday's 3% opening gap up that hurt the bears, this time the bulls are going to take some major heat. In the pre-market, both the S&P and Nasdaq futures are positioned to open 3 to 4% lower than last Friday's closing prices.

Right now, the U.S. stock market is obviously in a highly sensitive, news-driven environment that is wreaking havoc with sound technical analysis strategies. Obviously, there's not much we can do about that other than maintain a minimal number of positions on either side of the market until the dust settles. After the bullish reversal day on September 11, we took advantage of the following days opening gap down to scoop up some shares of Ultra Nasdaq 100 ProShares (QLD). The trade initially worked well, as our new QLD position is already showing a 2-point gain going into today's session. However, the opening price action is about to change the situation very quickly.

If, like ourselves, you presently have any long positions, we highly recommend having a predetermined plan of action for managing those positions, before the market opens. After the market opens, emotions run high, which can often lead to silly mistakes. Having a fixed plan of action before the opening bell will enable you to keep a cool, level head. If your long positions gap down sharply, strict or modified implementation of the MTG Opening Gap Rules is advisable, rather than panic selling on the open. We'll take an updated look at the charts, as well as any ETF setups out there, after we see the closing reaction to today's news.

Open ETF positions:

Long - IBB, QLD
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.