Stocks trended lower ahead of yesterday afternoon's decision on interest rates, but a subsequent lack of any surprises from the Fed enabled the broad market to recover off its lows. Still, each of the major indices closed in the red. Both the S&P 500 and Dow Jones Industrial Average lost 0.1%, but the Nasdaq Composite showed relative weakness by falling 0.5%. The S&P Midcap 400 Index also slid 0.5%, while the small-cap Russell 2000 declined 0.6%. The S&P and Dow finished in the upper third of their intraday ranges, but the Nasdaq closed just below the middle of its range. The price divergence between the major indices confirms what we illustrated in yesterday's newsletter, regarding the Nasdaq showing more relative weakness than the S&P 500.

Turnover rose across the board yesterday, causing the Nasdaq to register a bearish "distribution day." The minor loss in the S&P was not significant enough to confirm institutional selling. Total volume in the NYSE swelled 17% above the previous day's level, while the Nasdaq volume increased by 6%. Despite the "distribution day" in the Nasdaq, the NYSE volume remained below its 50-day average level for the seventh consecutive session. In the Nasdaq, it was the third day of higher volume selling within the past four weeks. It's normal to expect occasional bouts of institutional selling in a healthy market, but caution is required when the count exceeds more than three "distribution days" within a month. A concentrated analysis of the market's daily price to volume ratios enables one to see what is happening "under the hood" rather than merely assessing the obvious price action. We discuss changes in the market's volume on a daily basis because volume spikes are the hallmark of professional buying on the "up" days, and selling by hedge funds, mutual funds, and other institutions on the "down" days.

While most industry sectors closed in the red, the Banking Index ($BKX) reacted favorably to yesterday afternoon's Fed announcement. The $BKX followed through on Monday's breakout to a new record high, which we illustrated in the December 12 issue of The Wagner Daily. The DJ Utilities Index ($DJU) also built on the previous day's gain. Conversely, the Dow Jones Transportation Average ($DJT) was among the weakest sectors yesterday. The $DJT not only lost 1.2%, but it also broke a key support level and is now positioned for further downside. As for ETFs, the iShares Transportation (IYT | Quote | Chart | News | PowerRating) has a nearly identical chart pattern as the $DJT index. As you can see on the chart below, IYT is in the process of following through on a bearish "head and shoulders" chart pattern:

Not only did IYT break down below support of its ascending neckline yesterday, but the selloff also coincided with a break below the 50-day MA. From here, we should expect IYT to at least drop to support of its 200-day MA within the next several days. However, the projected price target from the top of the head down to the neckline puts IYT at a downside price target of just below the $81 level. We sent an intraday e-mail alert to subscribers yesterday, informing them we were initiating a new short position in IYT after it broke below its 50-day MA. The U.S. Oil Fund (USO | Quote | Chart | News | PowerRating) failed to follow through on its "bull flag" chart pattern, so we stopped out of it yesterday. But the new IYT position is already showing a small profit and looks promising. The UltraShort QQQQ ProShares (QID | Quote | Chart | News | PowerRating) also moved in our favor yesterday.

Open ETF positions:

Long QID, short IYT (regular subscribers to The Wagner Daily receive detailed stop and target prices on open positions and detailed setup information on new ETF trade entry prices. Intraday e-mail alerts are also sent as needed.)


Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and financial conferences around the world. For a free trial to the full version of The Wagner Daily or to learn about Deron's other services, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com .