Watch This Key Level in the QQQQ

Much like the previous day’s session,
stocks rallied in the morning, then meandered in a sideways to lower range
throughout the remainder of the day. The S&P 500, Nasdaq Composite,
and the Dow Jones Industrial Average each finished 0.2% higher. Small and
mid-cap stocks, often a leading indicator to the broad market’s direction, both
lagged behind. The Russell 2000 Index gained 0.1%, but the S&P Midcap 400 lost
0.1%. Each of the major indices again closed near the middle of their trading
ranges, confirming a lack of commitment by institutional traders ahead of
today’s Fed meeting on interest rates. As expected, it was a rather uneventful
day on a technical level.

Turnover was mixed yesterday, but still light overall. Total
volume in the NYSE declined by 4%, while volume in the Nasdaq was 2% higher than
the previous day’s level. Despite the uptick, Nasdaq volume remained below its
50-day average level. In the NYSE, volume fell to its lightest regular session
level since October 9. Market internals were bullish by only a narrow margin.
Advancing volume in the NYSE exceeded declining volume by a ratio of 1.2 to 1.
The Nasdaq was positive by only 1.4 to 1. We should hopefully see a gradual
increase in the number of shares changing hands after today’s FOMC meeting.

Taking an updated look at a couple of the major broad-based
ETFs, you will see that the Nasdaq 100 Tracking Stock
(
QQQQ |
Quote |
Chart |
News |
PowerRating) is clinging to
support of the lower channel of its uptrend. QQQQ has probed below that
trendline support in each of the past three sessions, but closed yesterday
barely above it:

By forming a “lower high,” QQQQ is in the process of rolling
over, but a trend reversal won’t be confirmed unless a subsequent “lower low” is
also marked. In order for that to occur, QQQQ must close below its December 1
low of 43.26 (1,760 in the Nasdaq 100 Index). We remain short the Nasdaq 100
from our December 7 entry. Rather than selling short QQQQ, we simply bought the
UltraShort QQQQ ProShares
(
QID |
Quote |
Chart |
News |
PowerRating), which is inversely correlated to the Nasdaq
100, and at a 2 to 1 ratio. If QQQQ confirms the break of its lower trend
channel, QID will correspondingly break out above upper channel resistance of
its downtrend.

The S&P 500 SPDR
(
SPY |
Quote |
Chart |
News |
PowerRating) is in a healthier position than
QQQQ because it is in the middle of its uptrending channel:

Obviously, new long positions have a higher chance of success
if they are S&P/Dow type sectors as opposed to the Nasdaq. Going into the start
of this month, most financial sectors were looking pretty weak, but some big
merger and acquisition activity in the banking sector on December 4 caused an
unexpected upward surge. Both the Banking Index ($BKX) and Securities
Broker-Dealer Index ($XBD) have since snapped back from bearish chart patterns
into what has now become bullish patterns. Not surprisingly, we stopped out of
our short position in the Regional Bank HOLDR
(
RKH |
Quote |
Chart |
News |
PowerRating), which we entered before
the sector’s M&A news on December 4. But considering that the $BKX index closed
yesterday at a fresh record high, we certainly don’t want to be short. Looking
at the chart below, notice how the $BKX has rallied back with a vengeance since
December 1:

In addition to newfound strength in financials, don’t forget
that the DJ Utilities Average ($DJU) also look pretty good. After a modest
three-day correction from its all-time high, the $DJU snapped back yesterday.
Barring any major shock from the Feds, the Utilities ETFs such as the Utilities
HOLDR
(
UTH |
Quote |
Chart |
News |
PowerRating) should continue their uptrends.

It’s positive for the S&P that the financials have rallied
back to their highs, but the problem is that tech remains weak. The
Semiconductor Index ($SOX) is in “no man’s land,” which certainly does not bode
well for the Nasdaq. The S&P and Dow could easily break out to new highs from
here, but the indices probably would not get very far without the Nasdaq leading
the way. A mostly cash position still is not a bad idea, but you may want to
position yourself on both sides of the market if you are heavily invested in the
market right now. If the Nasdaq pulls the S&P below its uptrend line, you can
quickly cut your long positions. Conversely, if the S&P pulls the Nasdaq back to
its high, you can cover your shorts with minimal damage. Given the anticipated
post-Fed volatility from today’s meeting on interest rates, this is one way to
reduce your overall risk until the market makes up its mind.

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 .