1 Long and 1 Short ETF position

Yesterday’s session was a roller
coaster ride, but stocks finished with solid gains that enabled the major
indices to erase most or all of Monday’s losses. After beginning the
day with an opening gap up, the market rallied throughout the morning session,
but a wave of selling hit the market at mid-day. The sell-off caused the Nasdaq
to reverse and briefly drop to the previous day’s close, but the bulls pushed
stocks back towards their highs in the final ninety minutes of trading. The S&P
500 rallied 0.9%, the Nasdaq Composite 0.8%, and the Dow Jones Industrial
Average 0.7%. Both the small-cap Russell 2000 and S&P Midcap 400 indices snapped
back with gains of 1.2%. Overall, it was a volatile intraday tug-of-war, but the
bulls finished with the upper hand. Each of the major indices also finished near
their best levels of the day, but were unable to overcome resistance of their
morning highs.

The one thing lacking from yesterday’s session of broad-based
gains was higher turnover. Total volume in the NYSE ticked higher by only 1%,
while volume in the Nasdaq was 3% lighter than the previous day’s level. If the
gains would have occurred on firmly higher volume, it would have indicated
accumulation of stocks by institutions such as mutual, hedge, and pension funds.
Instead, it appears that institutional traders were not in a hurry to jump back
into the market after Monday’s sharp correction. Since more than half of the
market’s average daily volume results from institutional trading activity,
rallies are rarely sustainable when they are backed largely by retail investors
instead of institutions., This is especially true of rallies that follow a sharp
correction such as the one we saw on Monday.

The real action yesterday was in the oil and oil services
sectors. Crude oil convincingly broke out to over $60 per barrel, enabling the
U.S. Oil Fund
(
USO |
Quote |
Chart |
News |
PowerRating) to finally move above its two-month downtrend line and
close above its 50-day moving average for the first time since August 11:

As is typical, the strength in crude oil triggered strong
rallies in both the Oil ($XOI) and Oil Services ($OSX) sectors as well. Of all
the major sectors we track on a daily basis, the $OSX index netted the largest
gain yesterday by surging 4.0% higher. This pleased us because it enabled our
corresponding long position in the Oil Service HOLDR
(
OIH |
Quote |
Chart |
News |
PowerRating) to advance 3.8%.
More importantly, the technical pattern of OIH now looks pretty bullish:

The 200-day moving average acted as a brick wall, as if often
does, that stopped the numerous attempts for OIH to break out over the past
three weeks. But yesterday, it finally blasted through the 200-MA. The more
difficulty a stock or ETF has in breaking out above a resistance level, the more
momentum the subsequent breakout will have. Therefore, OIH should be good for
further upside in the short-term. Presently, our position in OIH is showing an
unrealized gain of nearly five points, but it is only half way to our price
target, which is just below the prior high of $150 that was set on August 2. If
you missed the initial entry, any pullback to near the 200-day MA is an ideal
place to buy because that moving average should now provide very strong price
support. We also bought several individual oil and gas stocks in

The MTG Stalk Sheet,
each of which are also breaking out of bases of consolidation.

One sector that has begun to look pretty bearish lately is the
Banking Index ($BKX):

As you can see, the $BKX broke down below support of its
50-day moving average a few days ago, after failing to hold in a tight pattern
of consolidation. Over the past two days, it has bounced with the broad market,
but now has a lot of overhead supply to contend with. We therefore view the
rally into the 50-MA and prior consolidation as a low-risk entry point to
initiate a new short sale entry in the sector. There are numerous ETFs
correlated to the financial sectors, but a complete list can be found on the
free

Morpheus ETF Roundup.
Of them, we feel the Regional Bank HOLDR
(
RKH |
Quote |
Chart |
News |
PowerRating) has one of the best chart
patterns for short entry. Regular subscribers will see our trigger, stop, and
target price on RKH below. The streeTRACKS Capital Markets
(
KCE |
Quote |
Chart |
News |
PowerRating), which
tracks securities broker-dealers, also looks pretty good for short selling
because its last breakout appears to be failing.

Despite the lack of high volume confirmation, it was bullish
that the S&P 500 managed to recover all of its November 27 loss over the past
two sessions and has moved back above its primary uptrend line. Stocks are
giving some mixed signals now, so caution is in order on both sides of
the market. Due to the minimal overhead supply, the major indices to once again
rip to new highs, but they could just as easily roll over and resume Monday’s
correction. Rather than trying to predict which way the market will go next, we
are simply positioning ourselves on both sides of the market by attempting to
buy the sectors with the most relative strength and best chart patterns, while
selling short the inverse. Remember to trade what you
see, not what you think!

Open ETF positions:

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 .