The major indices capped a negative week with another session of losses last Friday, as stocks sold off sharply in the first thirty minutes of trading, then oscillated in a narrow, sideways range throughout the remainder of the day. The Dow Jones Industrial Average fell 1.6%, the S&P 500 2.1%, and the Nasdaq Composite 2.8%. The small-cap Russell 2000 Index took it on the chin, tumbling 4.1%. The S&P Midcap 400 Index shed 2.7%. Though stocks attempted to bounce in the afternoon, a wave of selling in the last fifteen minutes of trading caused the main stock market indexes to close at their intraday lows. For the first full week of trading in the new year, the Nasdaq Composite lost 3.7%, the S&P 500 4.4%, and the Dow Jones Industrials 4.8%.

Slightly lower volume across the board was perhaps the silver lining of last Friday's session. Total volume in the NYSE declined 3%, while volume in the Nasdaq was 2% lower than the previous day's level. The lighter volume losses tell us institutions were not aggressively running for the exit doors. Nevertheless, remember that the high volume gains of January 6 were deceiving, as that day's "churning" was the result of institutional selling into strength. Declining volume in the NYSE exceeded advancing volume by nearly 6 to 1. The Nasdaq adv/dec volume ratio was negative by 3 to 1.

In the January 5, 2008 issue of The Wagner Daily, we looked at the potential bullish intermediate-term trend reversal that was developing in the DB Commodity Index Tracking Fund (DBC). Thereafter, DBC briefly rallied above resistance of its prior "swing high" of December 12, as well as its 50-day MA, but the breakout remained intact for only one day before pulling back again. Now, however, the short-term 20-day exponential moving average is acting as support to catch the price of DBC, which is forming a "higher low." As such, we expect another upward thrust of DBC in the coming days. When that occurs, a rally above the 50-day MA on this second attempt is more likely to follow-through to the upside. We like DBC for long entry above the $22.35 area:



Over the past week, we've been focused on the 50-day moving average of the S&P 500 as a key level of price support. Last Friday, the S&P 500 precisely kissed its 50-day MA, then closed less than two points above it. Looking at the daily chart of the S&P 500 below, notice how the 50-day MA also converges with support of the intermediate-term uptrend line from the November 2008 low:



Because the 50-day MA is such a pivotal level of price support, the broad market's price action of the next several days will tell us a lot about the likely direction of stocks over the intermediate-term. If the S&P 500 holds above its 50-day MA, and subsequently rallies to break out above its January 6 "swing high" of 943, we would expect the bullish bias to persist for at least the next several weeks (or longer). But if the index convincingly closes below its 50-day MA, after trading above it for less than two weeks, the market's bullish bias would quickly become jeopardized. If the late December "swing lows" become broken (below the 850 level in the S&P 500), we would begin looking for new short sale entries in the broad market, as a subsequent test of the 52-week lows would have a good chance of developing. As volume continues returning to the markets this week, pay attention to the corresponding price-volume patterns as well.

Although the overall bias remains cautiously bullish, not too many industry sectors are taking leadership of the markets. Individual leading stocks have also displayed negative price action over the past several days. As such, there is no need to aggressively enter into new ETF positions when conditions are unclear and lacking momentum. Presently, we are simply in a temporary holding pattern from the volatility stocks have experienced in recent months. As volume levels return to normal, we'll be closely monitoring to see whether or not the broad market is able to confirm the bullish price patterns that were observed into the final days of 2008.

Open ETF positions:

Long - TAN, FXY, GDX, SLV, USO
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.