Following through with a second straight ascending "trend day," the major indices finished the year on a positive note. After climbing steadily throughout the entire session, the Nasdaq Composite rose 1.7%, the S&P 500 1.4%, and the Dow Jones Industrial Average 1.2%. Small and mid-cap stocks showed relative strength again, as the Russell 2000 zoomed 3.4% higher and the S&P Midcap 400 climbed 2.6%. A pullback in the last fifteen minutes of trading caused the main stock market indexes to only finish near the upper third of their intraday ranges, but a bit of whippiness in the final minutes of the year's trading was not surprising.

Volume ticked moderately higher ahead of the New Year's Day holiday, but still remained below 50-day average levels. Total volume in the NYSE swelled 35%, while volume in the Nasdaq increased 11% above the previous day's level. The broad-based gains on higher volume technically enabled both the NYSE and Nasdaq to register a bullish "accumulation day," though the implication of institutional buying could be deceiving because turnover was already at such low levels. Market internals remained very strong for a second consecutive day. In the NYSE, advancing volume exceeded declining volume by a margin of more than 6 to 1. The Nasdaq adv/dec volume ratio was positive by 4 to 1.

Over the past week, we've discussed the bullish patterns in several of the alternative energy ETFs. On December 31, two ETFs we've been monitoring, Claymore Global Solar Energy (TAN) and Market Vectors Global Alternative Energy (GEX), broke out. This is shown on their daily charts below:





Although volume in the overall market remained well below average levels in the December 31 session, notice how turnover in both TAN and GEX exceeded their 50-day average volume levels (the green line on the volume bar chart). This is a subtle sign of initial institutional buying interest, albeit not yet confirmed. As volume in the market begins returning over the next week, TAN and GEX may provide ideal pullback entry points (if not already long from our initial heads-up earlier in the week).

On December 30, both the S&P 500 and Dow Jones Industrial Average rallied to close above key resistance of their 50-day moving averages. The following day, the Nasdaq Composite followed suit, as the S&P and Dow moved more convincingly above their 50-day MAs. Still, the major indices must contend with resistance of their prior highs from early and mid-December before declaring a breakout above the sideways trading ranges of the past three weeks. This is shown on the daily chart of the S&P 500 below:



For the S&P 500, pivotal resistance of the December 2008 highs is near the 919 level, less than 2% above its current price. With a similar chart pattern to the S&P 500, the Nasdaq Composite may face resistance around the 1,600 level. The Dow's December highs are in the 8,950 to 9,000 range. Over the next week, keep an eye on price action near those levels. If the main stock market indexes manage to clear those highs, the next stop would be their November 2008 highs.

In the December 31, 2008 issue of The Wagner Daily, we discussed several technical reasons a rally above the 50-day MAs of the major indices had a better chance of "sticking" this time, at least in the short to intermediate-term. With the Nasdaq Composite catching up, we now begin 2009 with each of the main stock market indexes above pivotal support of their 50-day moving averages. On a technical level, this is a great way to start the new year, as the 50-day MA is commonly used by institutions as a general indicator of intermediate-term trend direction. The longer the major indices manage to stay above their 50-day MAs, the more buying among mutual funds, hedge funds, and other "smart money" we may see in the short to intermediate-term. Nevertheless, long-term broad market bias remains bearish until stocks reclaim their 200-day moving averages, which are well above current price levels.

Open ETF positions:

Long - GDX, SLV, INP, FXI, SMH
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.