Stocks closed mixed on Friday on light volume. High beta stocks showed relative weakness on the day as the small-cap Russell 2000, S&P MidCap 400 and Nasdaq finished lower by 0.6%, 0.3% and 0.1% respectively. The Dow Jones Industrial Average closed higher by 0.2% while the S&P ended fractionally up on the day.

Market internals ended mixed on the day. Volume fell dramatically on both exchanges. By the closing bell turnover on the Nasdaq was down by over 35.0% and on the NYSE by 30.0%. Advancing volume ended the session fractionally higher across the board. Market internals reacted much as would be expected as the market took a rest following Thursday's big accumulation day.

As we stated in Friday's newsletter, we are of the opinion that the market may be approaching an overbought level. Our broad view of the market remains bullish but we also believe caution is now warranted on the long side of the market for the short run. A quick look at the NYSE, S&P 500 and Nasdaq support this reasoning. The NYSE is now approaching the neckline of the head and shoulders pattern that it formed over the summer. As you may recall, the NYSE was the index that provided us with the biggest clue that the market could be in for a big move lower back in late July. Notice that all three indices are at important resistance levels and very close to big reversal days that were the fuel for the recent bear market.







As stated earlier, we feel that caution is warranted for the moment. Although we have received a bullish signal in the market, we are still not seeing the emergence of new leadership stocks. We expect these stocks to being breaking out soon. However, until they do, we cannot eliminate the possibility that the market could reverse quickly at the current levels.


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.