For new trading setups, watch the blue line on this chart

Turnover was high for the second day in a row with the
overall volume increasing by 14% on the NYSE and coming in just 3% lower than
Tuesday’s trade on the Nasdaq. This on the heels of a 16% increase in
overall volume on the Nasdaq on Tuesday would tell us that the overall Nasdaq
volume yesterday was quite respectable. Decliners out paced advancers on the
NYSE by 1097, and by 1519 on the Nasdaq. Declining volume was running 3 to 1 in
relation to advancing volume on the NYSE, and 3.6 to 1 on the Nasdaq at the
closing bell. As mentioned yesterday, if we take into account that Friday’s huge
overall volume was an anomaly that was skewed due to outside factors, we have
now had three distribution days in a row on the New York Stock Exchange. This is
relatively rare and should be interpreted as quite bearish. Keep in mind that
overall volume patterns tend to lead the markets by a margin of a few weeks to a
month, so the effects of these high turnover down days may very well manifest
themselves in some panic selling later on if the market begins to systematically
post lower highs in the months going forward.

When the markets surged forward in early September after a
rather dismal August, there were many analysts who were crowing about the fact
that the market was able to recover 90% of the earlier month’s losses in just
six trading sessions between September 1st and September 9th. It should be noted
that virtually all of those gains have been taken back in only three
trading sessions. The daily chart of the S&P below illustrates this key
technical event.

Pay attention to the lower horizontal blue line in the chart
above. This psychologically significant 1200 area in the index is where we
bounced at the end of August and set the stage for the early September rally. It
should be clearly noted, however, that the September advance fell short of the
prior 2005 (and four year) highs at 1245.86 and has now been all but erased in
three days as mentioned above. It would be easier to call for the 1200 area as
strong support that could be buyable if the other averages were also holding
just above their pivots that correspond with the late August lows. The problem
here is that they are not. As evidenced by the charts below, the Dow is
dangerously close to breaking this support area and the Nasdaq (which tends to
act as a leading index), has already lost it.

All of the above only confirms what was said in yesterday’s
publication. That being, regardless of what all the talking heads in the
media are saying, the market is still range-bound and has no clear direction in
the near term. Some sectors are moving and some are not. Be selective out there.

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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