In Monday's action, the major indices posted mixed results on lackluster volume. The Dow reversed its short-lived leadership role from last Thursday, as it was the only index to lose ground on the session. The small-cap Russell 2000 was the only index to show an appreciable gain, by finishing the day up 0.4%. The Nasdaq, S&P 500 and the S&P MidCap 400 all finished just above the flat line yesterday. Each managed a barely significant 0.1% improvement for the day. The Dow Jones Industrial Average fell 0.2% in Monday's trading.

As has been common lately, market internals were unimpressive on Monday. Turnover was decidedly down on both the NYSE and the Nasdaq. Volume plummeted by 24% on the NYSE and 14% on the Nasdaq. Advancing volume fared only slightly better than declining volume on both major indices. On the NYSE, up volume outpaced down volume by a ratio of 1.3 to 1. The ratio was slightly better among technology stocks, as the advancing to declining volume ratio finished the day at a positive 1.5 to 1 on the Nasdaq. Based on market internals, institutional involvement has been clearly absent from the market over the past two weeks.

We sent an alert on Monday stating that we sold our long position in XOP at the market. We made a judgment call to sell all of XOP due to the lack of a strong market, and our relatively high exposure to oil /oil related sectors. We exited the trade and locked in a nice gain of approximately $1,000. Further, this move frees up buying power to take advantage of potential short exposure in the event of a market correction.

The iShares MSCI Chile Investable Market Index ETF (ECH), has been under selling pressure for the past several trading sessions. Yesterday, it tested its 50-day MA for the first time since mid November. Given the price and volume action, ECH may be poised as a possible long entry. The setup we are looking for is an undercut of support at the 50-day MA followed by a quick reversal back above this key mark. The undercut serves to sweep poorly placed stops, scare the weak hands out of the market and lure bears into the market. Under this scenario, if a reversal back above the 50-day MA occurs, it is often accompanied by a short squeeze. This technical pattern has been quite common since the broad market rally began in March, 2009.


Since a false breakout on December 7, the SPDR S&P Retail ETF (XRT), has been consolidating in a tight range. Further, the consolidation has been accompanied by light volume, which is generally considered bullish. A volume assisted move back above the December 23 high of $48.56, provides a potential long trigger for this ETF. This is another setup that has been quite common over the past 18 months (false breakout... consolidation...breakout). We like this technical pattern and will be monitoring it closely as a possible long entry.



Although December began with a powerful rally, there has been little followthrough as we near the end of 2010. As is common with the holiday season, trade has been light, and price action muted. Although the week before New Year's is generally uneventful, we remain alert for trading opportunities and the potential for a market reversal.

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.