The Nasdaq Composite posted its fourth straight day of losses yesterday, while the more technology focused Nasdaq 100 Index touched its 50-day moving average for the first time since the current uptrend began in the middle of August. Stocks gapped modestly higher on the open, trended lower throughout the late morning and mid-day, then moved in a choppy, sideways range throughout the remainder of the session. The Nasdaq Composite lost 0.5%, the S&P 500 slid 0.4%, and the Dow Jones Industrial Average closed 0.3% lower. The S&P Midcap 400 declined 0.5%, while the small-cap Russell 2000 gave up 0.3%. Each of the major indices finished above their lows, but in the bottom third of their intraday trading ranges. It was the fourth time in the past five sessions that the broad market settled the day near its intraday low.

Total volume in the NYSE declined by 2%, while the Nasdaq's volume was on par with the previous day's level. Despite each of the major indices once again closing in the red, turnover remained subdued. The biggest positive of the past week's losses has been the lack of heavy institutional selling. In both exchanges, only one of the past four "down" days have been on higher volume. While the bulls may be taking a break for a while, the bears have not yet demonstrated an extreme willingness to sell. Of course, it would not be illogical for one to conclude that institutional traders are absent on both sides of the market due to the holiday season. When volume returns after the new year, we'll get a clear idea as to which way the mutual funds, hedge funds, pension funds, and other big players want to take the market. Until then, it's wise to take it easy with no trade entries, especially on the long side.

In the December 13 issue of The Wagner Daily, we explained why we initiated a new short position in the iShares DJ Transportation (IYT | Quote | Chart | News | PowerRating) the previous day. Specifically, we liked that it had formed the right shoulder of a bearish "head and shoulders" chart pattern, so we expected further downside. The IYT short trade has followed through nicely since then, so we took profits by covering the position for a 3-point gain yesterday. Although IYT is still slightly above our original downside price target, we made a judgment call to lock in the gain because it failed to bounce at support of its 200-day MA on the way down. This tells us that it could easily snap back up to the 200-MA, or perhaps higher, if the market bounces. An initial bounce and subsequent failure to hold above the 200-day MA a few days later would have increased the odds of further downside in the short-term, but that wasn't the case. Nevertheless, we netted a solid gain on this setup:

One sector we are stalking for potential short entry is the Retail Index ($RLX), which closed below support of its 50-day moving average for the first time since August 30. More importantly, the break of the 50-day MA followed a failed breakout to a new all-time high last week. Failed breakouts out of a long base of consolidation are often among the most profitable short setups because all the bulls who bought the breakout become trapped. Their selling a few days later attracts the interest of the bears, who spotted the failed breakout. That's how the $RLX index went from a new record high down to closing below its 50-day MA only four days later:

In the short-term, the $RLX index is a bit oversold and not at an ideal entry point for a short sale. However, a bounce in the next day or two would provide a positive risk/reward ratio for new trade entry on the short side. The Retail HOLDR (RTH | Quote | Chart | News | PowerRating) is a very popular ETF for trading the sector, but a list of other Retail ETFs can be found by downloading our free Morpheus ETF Roundup guide.

As for the broad market, it's probably best to avoid entering new positions today. With an extended holiday weekend coming up, volume is likely to be very light today. When turnover dries up, erratic and whipsaw conditions often occur. So, rather than looking for new trade entries, it's best to focus on managing existing positions and making a watchlist for potential entries next week.

NOTE: The U.S. stock markets will be closed on Monday, December 25, in observance of Christmas Day. The Wagner Daily will not be published that day, but regular publication will resume on Tuesday. Have a great holiday weekend with your friends and family!

Open ETF positions:

Long QID, MZZ, GLD (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 .