Stocks lost ground on Friday on higher trade. Friday's lower close resulted in mixed results for the major indices in 2011. The Dow Jones Industrial Average finished just over 5.0% higher in 2011, while the S&P ended flat and the Nasdaq slid almost 3.0%. Overall, it was an unimpressive year for stocks. On Friday however, the Dow Jones Industrial Average showed the least resiliency as it fell 0.6%. The S&P MidCap 400 and the small-cap Russell 200 both dropped 0.5%. The S&P 500 slid 0.4% while the Nasdaq contained losses to 0.3%.

Technically speaking, market internals were bearish on Friday. However, due to pre-holiday light volume trade, it is difficult to definitively categorize price action in this type of environment. In the absence of massive reversal candles and/or volume that is close to its 50-day moving average, it is likely unreasonable to consider Friday a true distribution day. Tuesday's price and volume action should provide a much better read on the current state of the market.

On Friday we entered a long position in the iShares DJ US Telecom Sector ETF (IYZ) as it broke above the six-day high, on its biggest uptick in volume in nearly two weeks. Normally, we would not have entered this trade on the Friday of a holiday weekend, but IYZ had recently undercut all of its moving averages and broke out on reasonably high volume. In combination, both of these factors provide evidence that the trade is much more likely to hold. Trade details are available to our subscribers in the open positions section of the newsletter. This trade was sent via intraday alert and was not on the watchlist.



The Direxion Daily Gold Miners 3x Bear ETF (DUST) recently exploded above all three of its major moving averages. However, over the past two sessions, DUST has come under considerable selling pressure and is now approaching support of its uptrending 20-day exponential moving average. An undercut of this key support level could provide a buying opportunity in this inverse ETF.



Now that the holidays are behind us, volume should begin returning to the market. Hopefully we will also get a better read on market direction. For the moment, our bias is modestly bullish. The fact that the S&P 500 and DJIA are hovering near breakout levels is promising for the long side of the market. Nonetheless, we have both long and short positions on the watchlist so that we might capitalize on a sharp move in either direction.

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.