It’s make or break time

Like the previous day, stocks drifted
in a sideways range throughout Thursday
, but
only the tech-heavy Nasdaq
(
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registered gains. The S&P 500, Dow Jones
Industrial Average
(
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, and mid-cap S&P 400 indices were each unchanged
and closed near the middle of their intraday ranges. The Nasdaq Composite,
however, showed relative strength by gaining 0.6% and closing at its intraday
high. The Nasdaq’s gain enabled the index to set a new four-year closing high,
although the December 6 intraday high is still two points above yesterday’s
close. The small-cap Russell 2000 Index gained 0.4%.

The changes in yesterday’s volume levels were as uneventful as
the broad market’s trading activity. Total volume in the NYSE declined by 2%,
while volume in the Nasdaq was 1% lower than the previous day’s level. Because
the S&P 500 was flat and volume in the NYSE was nearly unchanged, yesterday’s
price to volume ratio does not tell us much. But considering that stocks held on
to their gains from the prior two days and the Nasdaq outperformed, one could
assume that yesterday’s market action leaned to the bullish side overall. This
is further confirmed by the fact that the NYSE market internals were flat, but
advancing volume exceeded declining volume by nearly 3 to 1 in the Nasdaq. That
the major indices did not succumb to bearish churning action after two days of
gains is also positive.

The Semiconductor Index
(
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, which was trading near the
lows of its range only a few days ago, popped to a new 52-week closing high
yesterday. As the 50-day moving average rose to provide support coming into the
new year, the $SOX suddenly began to wake up and show relative strength. The
sector has gained more than 6% over the past three sessions and has been largely
responsible for pulling the Nasdaq along with it. Remember that the Nasdaq
usually tends to follow the $SOX index because semiconductor stocks are so
heavily weighted. Therefore, it is definitely a positive that the semis have
begun to once again show relative strength. SMH (Semiconductor HOLDR) also
closed at a new 52-week high yesterday, but ideally we would prefer to see it
consolidate for a few days before buying it. After three straight days of gains
and a rally to just above the prior high, a "cup" has formed as part of the
bullish "cup and handle" pattern. Three to five days of sideways consolidation
from here would form the "handle" portion of the pattern as well. From that
level, any breakout above the high of the "handle" would be buyable. The daily
chart of SMH below illustrates the strong reversal off the 50-day moving average
support level:



Both the S&P and Nasdaq are toying with pivotal levels in
which they will either "make it or break it" in the short-term. Both indices are
sitting at fresh four-year closing highs, but only marginally. Neither index has
rallied hard enough to declare a confirmed breakout to a new high. This, of
course, could easily happen within the next day or two, but resistance of the
prior highs could just as easily scare traders into selling into strength at
current levels. While there are more sectors with bullish chart patterns than
bearish ones, astute traders will be prepared to reverse direction at a moment’s
notice. Above all, remember to
trade what you see, not
what you think!


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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 .