Potential Short Entries in Retail ETFs

A continued lack of institutional
trading activity led to a choppy and erratic session that concluded with small
losses across the board. After drifting lower throughout the morning,
the major indices briefly rallied into positive territory in the afternoon, but
selling in the final hour pushed stocks back into the red. Both the S&P 500 and
Nasdaq Composite lost 0.2%, while the Dow Jones Industrial Average slipped 0.1%.
The small-cap Russell 2000 and S&P Midcap 400 indices each fell 0.4%. Most of
the major market indexes finished near the middle of their intraday ranges.

Turnover was mixed, but remained well below average levels.
Total volume in the NYSE declined by 6%, while volume in the Nasdaq was 2%
higher than the previous day’s level. Despite having posted a bullish
“accumulation day” the previous session, yesterday’s higher volume caused the
Nasdaq to register a bearish “distribution day.” But considering that volume
levels remained well below average, it’s inaccurate to say that heavy
institutional selling was present. Market internals were negative in both
exchanges, but not by a wide margin. In the NYSE, declining volume exceeded
advancing volume by a ratio of just under 3 to 2. The Nasdaq was negative by 1.8
to 1.

On a technical level, yesterday’s action was rather uneventful
for the major indices. Both the S&P and Nasdaq had “inside days,” meaning the
range from their intraday lows to highs were completely contained within their
respective ranges of the previous day. When in a steady trend, “inside days”
often lead to a continuation of the trend, but they are rather meaningless when
an index is trapped in a choppy, sideways range. Nevertheless, the Nasdaq tried
and failed to move back above resistance of its 20-day MA for the second
straight day. If it fails to do so within the next day or two, the Nasdaq will
likely roll over to break support of its 50-day MA that it bounced off of on
December 26.

The Retail Index ($RLX), which we pointed out as a failed
breakout and potential short, may be setting up to provide ideal short entries
in the Retail ETFs. It bounced back above its 50-day MA on December 27, but ran
into resistance of its 20-day MA. The index dropped to close yesterday right at
its 50-day MA. A break below yesterday’s low should send the $RLX to a breakdown
below its recent range. As for the other industry sectors, we’ll take an updated
look at which ones are showing the best and worst chart patterns after volume
returns to the markets. Hopefully, that should happen after New Year’s Day.

NOTE: The U.S. stock markets will be closed on Monday,
January 1, in observance of New Year’s Day. The Wagner Daily will not be
published that day, but regular publication will resume on Tuesday. We thank all
of you for your support and enthusiasm in 2006. Be assured that we will continue
working hard to bring you top notch analysis and commentary in 2007!

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 .