Despite preceding a rare four-day holiday weekend that included Tuesday's closure in honor of the passing of President Ford, last Friday's session was marked by a decent amount of volatility. After rallying higher in the first hour, stocks drifted back down to the flat line through mid-day, then sold off in the final trading hour of 2006. Both the S&P 500 and S&P Midcap 400 indices lost 0.5%, while the Nasdaq Composite declined 0.4%. The blue chip Dow Jones Industrials fell only 0.3%, but the small-cap Russell 2000 shed 0.9%. Each of the major indices finished near the bottom of their intraday ranges.

Turnover picked up in both exchanges last Friday, but remained well below average levels. Total volume in the NYSE increased by 13%, while volume in the Nasdaq was 9% higher than the previous day's level. The losses on higher volume caused both the S&P and Nasdaq to register bearish "distribution days." However, it was the seventh straight session in which volume in both exchanges was lower than 50-day average levels. Obviously, a lack of institutional participation is normal in the week between Christmas and New Year's Day. Now that the holiday season has passed, volume should return to average levels in the coming days. Pay close attention to the relationship between the stock market's price action and volume increases in order to determine what institutional traders are doing beneath the surface. The action in the first week of the new year is likely to set the tone for at least the rest of the month.

Since you've probably already been inundated with stock market recaps for 2006, we won't bore you with yet another rundown of how the major indices performed last year. Instead, we'll give you a fresh, forward-looking technical outlook of the S&P, Nasdaq, and Dow that can assist you with your trading decisions in the coming weeks. Let's begin by analyzing the daily chart of the benchmark S&P 500:

The S&P 500 is entering the new year less than one percent below its 52-week high. It is also less than nine percent below its all-time high that was set back in March of 2000. But although its long-term monthly chart remains in a healthy uptrend, the daily chart shows the S&P is in danger of breaking its six-month primary uptrend line (the dashed blue line). After correcting down to support of its 20-day moving average on December 22, the index quickly rallied back to test its prior high, but ran out of gas and headed back down on December 28 and 29. This has created a "lower high" that is marked by the high of December 27. Going into this week, that 1,427 price level is a clear area of price resistance to pay attention to. Conversely, pivotal support of its primary uptrend line (and the 20-day MA) is just below last Friday's close. If the S&P breaks below that level and closes below the December 22 low of 1,410, it will form a "lower low" as well. If that occurs, the index will likely enter an intermediate-term correction that will at least lead to a test of its 50-day MA. Therefore, caution is required for all new long entries unless the S&P moves back above the 1,427 resistance. Next, take a look at the daily chart of the Nasdaq Composite:

It only takes a quick glance to see that the Nasdaq has been showing much more relative weakness than the S&P. Over the past seven weeks, the S&P has been moving steadily higher, but the Nasdaq has been stuck in a choppy, sideways range. In actual performance terms, the S&P has gained 1.2% since the week ending November 17, but the Nasdaq has lost the same percentage. On a technical level, the Nasdaq has already broken support of its six-month uptrend line and formed a double top in mid-December (the red horizontal line). Since then, the index has already tested support of its 50-day MA and has been consolidating near the low of its seven-week range. It attempted to pop back above its 20-day MA last Friday morning, but the bears took control and caused the Nasdaq to finish at its intraday low and just above its 50-day MA. Going into today, last Friday's high of 2,437 is the key resistance level traders will be focused on. An inability to quickly recover above that level could trigger a wave of selling that would lead to a confirmed break of its 50-day MA. It's positive that the index bounced off its 50-day Ma last week, but negative that it drifted back down to that level only three days later. Therefore, the Nasdaq is entering the new year at a "make it or break it" level that will determine its intermediate-term direction.

Curiously, the Dow has been showing the most relative strength of the three major market indices. It finished 2006 only 0.4% off both its 52-week and its all-time high. It is also holding firm near the upper end of its recent trading range and is not yet in danger of breaking its primary uptrend line. If the Nasdaq and/or S&P break down in the coming days, it will certainly weigh on the Dow. However, the blue chip index should also be the first to break out to a new high if trader return to the market in a bullish mood.

Presently, we still have three open ETF positions: StreetTRACKS Gold Trust (GLD), UltraShort QQQ ProShares (QID), and UltraShort S&P Midcap ProShares (MZZ). All three are long positions, but QID and MZZ are bearish positions that are inversely correlated to the movement of the Nasdaq 100 and S&P Midcap 400 indices. So far, each position is showing an unrealized gain, but we will be closely analyzing the market internals to determine whether to lock in our gains on QID and MZZ, or whether to continue trailing our stops higher if the Nasdaq remains weak. GLD is not directly correlated to the broad market, but it continues to act well. We'll return to analysis on specific industry sectors and ETFs as the market shows its hand in the coming days.

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.