Backed by the volatility of monthly options expiration day, the major indices closed modestly lower last Friday, capping a week of mixed results for the major indices. The Dow Jones Industrial Average slipped 0.1%, the S&P 500 0.3%, and the Nasdaq Composite 0.5%. The small-cap Russell 2000 lost 0.2%, as the S&P Midcap 400 Index declined 0.6%. Intraday price action was relatively tight; stocks merely oscillated in a sideways range throughout the day. The main stock market indexes closed between the middle and upper third of their intraday trading ranges. For the week, the Dow was slightly higher, but the S&P and Nasdaq both finished a bit lower.

Total volume in the NYSE rose 6% above the previous day's level, causing the S&P 500 to register a bearish "distribution day" last Friday. However, turnover in the Nasdaq receded 7%. Monthly options expiration is normally accompanied by a surge in trading, but volume in both exchanges still remained below 50-day average levels. It's been approximately two weeks since turnover in either the S&P or Nasdaq has been greater than average. During that same period, the main stock market indexes have been virtually unchanged, although they have been rather indecisive.

After a recent "washout" below its 50-day moving average, iShares South Korea Index (EWY) is now setting up for potential buy entry. The setup is illustrated on the daily chart below:



On the chart above, notice the tight consolidation now occurring, just above the 20 and 50-day moving averages. While consolidating, volume has also eased to lighter than average levels. It's positive when lighter volume accompanies periods of bullish consolidation, as it tells us institutions are not selling into strength. If EWY gaps above the high of its short-term range, bullish momentum could take it to a new 52-week high. However, beware of a breakout not backed by greater than average volume.

In our November 20 commentary, we pointed out the potential buy entry into PowerShares China (PGJ), and that setup is still valid going into today. Specifically, PGJ had "undercut" support of its breakout level, thereby shaking out the "weak hands." We said if PGJ got back above its breakout level and held, it would present a low-risk buy entry in anticipation of another leg up:



The S&P 500 SPDR (SPY) may be forming the right shoulder of a "head and shoulders" pattern on its hourly chart. Take a look:



Because the S&P 500 has ignored the formation of bearish "head and shoulders" patterns several times in recent months, powering higher instead, we don't have much conviction this pattern will follow through to the downside. Nevertheless, we're simply pointing it out as we see it, so that we can trade what we see, not what we think. As of the pre-market, the S&P futures are poised to open about 1% higher. If the gap fails to hold after the first thirty minutes of trading, SPY could easily slide back down to test last week's lows (which is also the "neckline" of the pattern). However, if the gap holds up, SPY could make another attempt to test its recent highs. Remember it's a holiday-shortened week, one which has a historical pattern of bullish bias.

Open ETF positions:

Long - DAG
Short (including inversely correlated "short ETFs") - RKH


Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.