Recovering most of their previous day’s losses, the major indices logged a round of solid gains last Friday. Stocks trended higher throughout the morning session, surrendered some of the advance in the afternoon, then drifted back up in the final hour of trading. The Nasdaq Composite increased 0.9%, the Dow Jones Industrial Average 0.7%, and the S&P 500 0.6%. The small-cap Russell 2000 and S&P Midcap 400 indices scored identical gains of 1.0%. All the main stock market indexes closed in the upper third of their intraday ranges, off their best levels of the day. Since recovering from the November 2 lows of the correction that began in mid-October, it was the second straight week of gains for the broad market.

As has been the case for all but one “up” day over the past two weeks, last Friday’s rally was accompanied by lighter turnover. Total volume in the NYSE was 6% lower than the previous day’s level, while volume in the Nasdaq eased 13%. Despite the Nasdaq’s climb off the November 2 lows, it was the ninth consecutive day of lighter than average volume in the index. The NYSE has printed seven straight days of below average volume. The slow pace of trading tells us mutual funds, hedge funds, and other institutions have been on the sidelines throughout most of this month’s rally. As we’ve seen, this does not mean stocks cannot continue higher in the near-term. However, the lack of institutional participation is a clear warning sign to astute traders because history has clearly shown that just one day of heavy institutional selling can easily erase multiple days of lighter volume gains.

In the November 13 issue of The Wagner Daily, we pointed out the relative weakness in several financial ETFs, explaining the reason for our previous day’s short sale entry into Regional Bank HOLDR (RKH). Even though the major indices registered solid gains last Friday, financials continued to show relative weakness to the broad market. While the S&P 500 gained 0.6% that day, RKH lost 1.1%. With financials showing so much bearish divergence, they should lead to the downside on any pullback in the broad market. With RKH, the 50-day MA is now establishing itself at overhead resistance:


One week ago, in our daily commentary, we said the major indices may be entering into a period of range-bound trading. So far, the sideways action of the past four days confirms that initial analysis. From the upside gap of November 9 through last Friday’s close, the benchmark S&P 500 was exactly unchanged. The Nasdaq and Dow were slightly higher. Going into this week, traders will be looking for a clear break out of that flat, short-term trading range in the S&P. On the upside, resistance of last week’s intraday high is at the 1,105 level. Support of last week’s low is at 1,085. As long as the S&P remains confined in that 20-point range, expect choppy and indecisive price action, along with light volume.

Today, at 12:15 pm ET, Fed Chairman Ben Bernanke is scheduled to discuss the central bank’s recent decision to keep interest rates low, despite the apparent effect on weakening of the U.S. dollar. The reaction to this major speech could spark a substantial market move in either direction, which would easily pick up momentum if institutional participation returned as well. We will not speculate on which direction stocks may move following the speech; rather, we simply advise you to be prepared for potential news-driven volatility later this afternoon. Institutions may be looking for a reason to return to the markets (on either the buy or sell side), and a speech by the Fed chairman could certainly provide such an impetus.

Open ETF positions:

Long – (none)
Short – RKH (half position), TWM (half position), TBT (TWM and TBT are inversely correlated “short ETFs” we’re long)

NOTE: Regular subscribers to The Wagner Daily receive daily updates on the open positions above, as well as new ETF trade setups, including trigger, stop, and target prices. Intraday Trade Alerts are also sent via e-mail and/or mobile phone text message on as-needed basis.

Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (, which he launched in 2001. Wagner’s new book, Trading ETFs: Gaining An Edge With Technical Analysis, was published by Bloomberg Press in August, 2008. Wagner also appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and financial conferences around the world.

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