In Thursday's action, four of the five major indices overcame morning selling pressure by recovering to finish on modestly higher ground; the Dow was the sole holdout. In yesterday's trade, the small-cap Russell 2000 led all indices by posting a 0.5% gain. Following closely behind, both the S&P 500 and the S&P MidCap 400 indices ticked 0.4% higher. Despite seeing heavier volume, the Nasdaq Composite only managed to rise 0.3%. Showing a bit of relative weakness, the blue-chip Dow Jones Industrial Average was unchanged for the session. Aside from the false breakout on December 7th, the Dow has remained handcuffed in a tight trading range, between 11,300 and 11,400, for the past five sessions. It is also the only index that has been unable to close above resistance of its November "swing high."

Turnover was higher than the previous day's levels on both the NYSE and the Nasdaq. The Nasdaq saw an impressive 10.2% increase in volume, but trade in the NYSE grew less than 2%. On the Nasdaq, advancing volume outpaced declining volume by a ratio of 1.8 to 1. The ratio also finished positive on the NYSE, but by a more impressive 2.6 to 1 margin. Although higher volume gains are generally considered to be positive, Thursday's internals gave no clear indication of commitment amongst mutual funds, hedge funds, and other institutions.

Over the past five trading days, the Dow Jones Industrial Average has acted like a nervous gunman, holding the market hostage. The direction of the Dow's next move out of its 5-day trading range will likely determine the near-term fate of the broad market. Technically, the Dow is not a very good indicator of broad market health because the index is comprised of only 30 stocks. However, because it is one of the most popular indexes monitored by the financial media, its direction bears a lot of psychological significance with regard to investor sentiment. If the Dow confirms the bullish move already made by the Nasdaq and the S&P 500, the odds favor a significant move higher, so we are monitoring the index closely:



With the recent weakness in the bond markets and subsequent increase in mortgage rates, the inversely correlated UltraShort Real Estate ProShares ETF (SRS) is exhibiting signs of a trend reversal. After a false breakout above its 50-day MA on November 16th, SRS was met with selling pressure that took it back below this key moving average. However, volume during the sell-off was light. Over the past three days, SRS has rallied on increased volume. Yesterday, SRS closed above its 50-day MA. A move above the November 29th high of $20.38 offers a possible buy trigger for this ETF. Investors looking for a bit of bearish exposure in their portfolio might consider buying SRS on such a move (as well as BZQ, discussed in our December 9 commentary). The SRS setup is shown on the daily chart below:



As we near the end of 2010, we are patiently awaiting the broad market's next move. Although the overall trend remains "up," and our porfolio is accordingly net long, we have taken a bit of short exposure with our recent purchase of UltraShort Brazil ProShares (BZQ). We have also recently tightened the stops in our other open ETF positions (6 of the 7 are currently showing unrealized gains, one is flat). When the market gives conflicting signals, as it has begun doing over the past week, it is always wise to proactively hedge the bet.

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.