The odds favor a breakout of the range

Indecision among traders caused the
major indices to seesaw between positive and negative territory
before finishing yesterday’s session fractionally higher. The S&P 500
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PowerRating),
Nasdaq Composite
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PowerRating), and S&P Midcap 400 indices all managed to gain
0.1%, but the Dow Jones Industrial Average
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PowerRating) was unchanged. The
small-cap Russell 2000 rallied 0.3%. Stocks were at their best levels late in
the morning, showed losses in the early afternoon, then recovered off their lows
to close in the middle of their intraday ranges.

Total volume in the NYSE increased by 10%, while volume in the
Nasdaq was 18% higher than the previous day’s level. The market’s gains on
higher volume technically caused an “accumulation day” to register for both the
S&P and Nasdaq. However, with such nominal gains and intraday indecision, the
session certainly did not have the feel of institutional buying. Despite the
rise in turnover, volume in both exchanges still came in below average levels,
just as it has done nearly every day this month. Advancing volume exceeded
declining volume in both the NYSE and Nasdaq, but not by a wide margin.

For the past four days, the broad market has been
consolidating in a choppy, sideways range. Below, we have illustrated these
ranges on the hourly charts of both the S&P 500 and Nasdaq Composite:

Because the broad market is consolidating near the high of
last week’s rally, odds technically favor an upward break out of the range and a
resumption of that short-term uptrend. However, remember that the
intermediate-term picture is still pretty negative, so we could just as easily
see a resumption of the primary downtrend. Unfortunately, we may not see
conviction in either direction until traders return from their summer vacations
and volume reverts back to normal levels.

Until the S&P or Nasdaq breaks out of the ranges shown above, your best play is
to enter SOH (sitting on hands) mode. It’s really easy to overtrade in a
range-bound market, but the most likely outcome is that you will merely churn
your account and grind away any profits you may have recently obtained.
Conversely, sitting patiently on the sidelines enables you to not only preserve
capital, but be in a position to quickly take advantage of either an upside or
downside move out of the range. If the market breaks out to the upside, be
prepared to buy the sectors with relative strength such as Semiconductors or
Telecom. If the major indices roll over, Financials, Oil, and even the
broad-based ETFs are among the good short sale candidates.

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 .