Be Wary Of Light Volume Gains

NOTE: Please click on the charts below to enlarge them if they do not appear clearly.

Stocks built on last Friday's gains in Monday's holiday-shortened session, but it was a rather uneventful trading day otherwise. The major indices moved higher out of the starting gate, then lethargically drifted sideways in a very tight range until the 1:00 pm ET closing bell. The S&P 500 and Nasdaq Composite both rallied 0.8%, as the Dow Jones Industrial Average gained 0.7%. The small-cap Russell 2000 and S&P Midcap 400 indexes both advanced 1.1%. The broad market again finished near its intraday high, though the day's range was too narrow to be of significance.

Volume obviously eased substantially. Total volume in the NYSE declined 73%, while volume in the Nasdaq similarly limped in 68% below the previous day's level. The Christmas Eve session is typically marked by the lightest turnover of the year, as an institutional presence is practically nonexistent. Trading activity will probably remain well below average levels until the New Year's Day holiday has passed.

In the December 19, 2007 issue of The Wagner Daily, we pointed out how the iPath India Index (INP) had retraced to support of its 50-day MA. Specifically, we said that the 50-day MA should lead to a few days of consolidation, followed by an attempted resumption of the primary uptrend. So far, that's exactly what has happened. Take a look:

On December 21, INP powered back above its 50-day MA, then gapped further the following day. It's bullish that INP is now above its 20-day EMA as well, but note that it closed Monday's session in the middle of the day's range. Keep an eye on the relative strength of INP over the next week. The most ideal situation would be a tight, sideways holding pattern until the new year, followed by strong volume and further price gains that take INP to a new high. This remains the strongest of the International ETFs for potential long entry; just beware of its high volatility.

The StreetTRACKS Gold Trust (GLD) has broken out above the upper boundary of its "wedge" pattern on the daily chart, but not convincingly so. If it moves above the high of the past two days, bullish momentum should kick in, sending GLD back to test its high. However, be on guard against a potential failed breakout if GLD drops back below the upper channel of the "wedge." In the current light-volume environment, one must be leery of such marginal breakout attempts:

Monday's bullishness shoved each of the main stock market indexes back above their respective 50-day moving averages. If they can hold there for the rest of the week, it may help the market's bias going into the new year. However, we cannot place much trust in Monday's action because of the minimal turnover and shortened session. A neutral stance until the new year remains the safest course of action, as it enables one to more easily capture profits on either side of the market when the mutual funds, hedge funds, and other institutions return to their operations. Again, use spare time this week to continue forging your 2008 Master Trading Plan.

Open ETF positions:

Long - (none)
Short - (none)

NOTE: Regular subscribers to The Wagner Daily receive daily updates on the open positions above, as well as new ETF trade setups, including trigger, stop, and target prices. Intraday e-mail alerts are also sent on as-needed basis.

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. Wagner is currently working on this third book, scheduled for publication in early 2008.

For a free trial to the full version of The Wagner Daily above, which includes detailed ETF trade setups and daily position updates, or to learn about our other newsletters, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com.

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