Bearish Crossover In The S&p 500

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

Driven by robust volume from last Friday's "triple witching" expiration of options, the stock market closed the week on a high point. The major indices gapped sharply higher on the open, oscillated in a narrow, sideways range throughout the day, then lifted a bit higher in the final ninety minutes of trading. The Nasdaq Composite zoomed 1.9%, the S&P 500 1.7%, and the Dow Jones Industrial Average 1.6%. The small-cap Russell 2000 continued its recent relative strength by surging 2.4%. The S&P Midcap 400 gained 1.6%. Opposite of the previous week, all the broad-based indexes finished at both their intraday highs and highest levels of the week.

Total volume in the NYSE spiked 50% above the previous day's level, while volume in the Nasdaq expanded 17%. Though it's positive that higher turnover matched the broad market's strong gains, much of the increased trading activity was likely attributed to the simultaneous expiration of stock index futures, stock index options, and stock options. Occurring on the third Friday of the last month of each quarter, "triple witching" usually triggers volume spikes as traders and investors attempt to jockey stocks towards specific strike prices. Market internals were firmly solid across the board. Advancing volume in the NYSE beat declining volume by nearly 6 to 1. The Nasdaq adv/dec volume ratio was positive by 4 to 1.

There's no denying that last Friday's advance was beefy, but most of the market's gains were the result of a strong opening gap up. Because it was not a "trend day," it was difficult to capitalize on the bullishness unless already long from overnight. Further, the price action on "triple witching" day often distorts dominant technical patterns that would otherwise prevail, adding additional risk to traders. For these reasons, don't feel as though you missed out on something if you were flat all day.

Going into the last full week of the year, the major indices have a lot of overhead supply and technical areas of resistance to deal with. The benchmark S&P 500 Index now sits just below convergence of its 50 and 200-day moving averages. A little higher is resistance of the primary downtrend line from this year's October high. These key areas of resistance are annotated on the daily chart of the S&P 500 below:

The bearish crossover of the 50-day MA below the 200-day MA has occurred for the first time since September of 2006. If it remains that way, it may be indicative of a long-term change of bias. This is especially true when you also consider the bearish "head and shoulders" pattern that has formed on the S&P 500 weekly chart. The Nasdaq Composite looks a little better overall, but the index closed right below its 50-day MA as well.

We view last week's strength as merely a counter-trend bounce within the dominant downtrend that has gripped the broad market in recent months. Our bias into the end of the year remains moderately bearish; however, we still don't plan to enter new positions until after the new year. Light turnover during the holiday season makes it tricky to profit on both sides of the market. We'll objectively re-assess the market and potential ETF trade setups after institutional trading activity begins returning next week.

NOTE: The U.S. equities markets will close at 1:00 pm ET today, and will be closed the full day on Tuesday, December 25. The Wagner Daily will not be published on December 25, but regular publication will resume the following day. Merry Christmas, Happy Hanukkah, Happy Kwanzaa, and Happy Boxing Day too! We wish you a relaxing holiday season with your friends and family.

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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