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

After falling to fresh near-term lows in the middle of the week, the major indices wrapped up the week with a relief rally in Friday's holiday-shortened session. Despite closing three hours early, the broad market scored impressive gains. The S&P 500 advanced 1.7%, the Dow Jones Industrial Average 1.4%, and the Nasdaq Composite 1.3%. The small-cap Russell 2000 Index rallied 2.0% after bouncing off support of its August low that it tested in each of the two preceding days. The S&P Midcap 400 gained 1.3%. Friday's session helped the bulls to breathe a little easier, but the main stock market indexes had a rough week nevertheless. The S&P 500 lost 1.2%, as both the Nasdaq Composite and Dow Jones Industrial Average slid 1.5%.

Turnover obviously declined in Friday's abbreviated trading day. Total volume in the NYSE was 59% below the previous day's level, while volume in the Nasdaq similarly declined 61%. Even factoring out the early close, trading in both exchanges was still approximately 30% lighter than the previous day at 1:00 pm ET. Market internals were quite bullish. Advancing volume in the NYSE exceeded declining volume by 12 to 1. The Nasdaq ratio was positive by more than 5 to 1. Still, don't forget that institutional participation was clearly lacking last Friday. It will be interesting to see whether or not mutual funds, hedge funds, and other big players attempt to build on those gains when they return to their desks today.

After closing below its 200-day MA for just one day, the Nasdaq Composite closed the week above it. Over the last several days, we've been monitoring the Nasdaq's price action around the 200-day MA because it was the only index remaining above it. Therefore, it's positive that the index was able to retain support of its 200-day MA after a one-day shakeout below it. The Nasdaq should at least attempt to build on Friday's reversal in the coming week, but there is a lot of overhead supply to contend with. If a decent amount of upside momentum enters the market this week, expect the Nasdaq to take a stab at resistance of its 20-day EMA in this bounce. The 20-day EMA at the 2,669 level is highlighted on the daily chart below:

Unlike the Nasdaq, both the S&P 500 and Dow Industrials are firmly below their 200-day MAs. This is a bearish signal for the long-term view of these indexes. But like the Nasdaq, it's reasonable to expect a short-term rally attempt to their respective 20-day EMAs this week. The 20-day EMA is at 1,471 for the S&P 500, and 13,266 for the Dow. In both indexes, a test of the 20-day EMAs would require further gains of 2.1% above current prices. The Dow will also run into its more important 200-day MA just a few points before the 20-day EMA.

Also helping the market with its recovery attempt this week should be the successful test of the prior significant low from August in the Russell 2000. The weekly chart below shows how the small-cap index perfectly bounced off its prior low of 736:

Because it has shown the most relative weakness on the way down, we can't expect the laggard Russell 2000 to save the market here. It has more overhead supply than any other major index, and is still nearly 3% below just its 20-day EMA. However, a further correction off its low in the near-term should help ease the overall selling pressure in the broad market.

On November 13, when all of the main stock market indexes surged approximately 3%, we noted one problem with the rally in the following day's commentary. Specifically, we said that, "The largest gains in the market were merely in stocks that have been beaten senseless over the past week. If institutions were jumping back in the market, we would expect to see bullish breakouts in the few remaining stocks that were consolidating at their highs. Instead, those leading tickers such as UTHR, ONXX, and MBT barely budged. Sure, Apple (AAPL) gained 10% yesterday, but it had also failed its breakout to a new high and plunged 20% over the preceding four days. The biggest gainers yesterday were similar situations as Apple. Overall, this tells us that yesterday's rally was largely driven by short covering and "bargain hunting" by individual retail investors. We feel it was not the work of market-moving institutions who instead would have been accumulating the strongest stocks, triggering breakouts to new 52-week highs." Our phlegmatic assessment of the November 13 price action was quickly proven correct. Just four days later, the S&P, Nasdaq, and Dow each had given back that day's "monstrous" gains, and then some.

As with the November 13 rally, we noticed that last Friday's biggest gainers were primarily comprised of the weakest stocks. Retail and Financial sectors turned in the largest percentage gains, but both industries have been free-falling lower practically every day. Again, there was a complete lack of strength in stocks with the most bullish chart patterns. A handful of medical and biotech stocks continue to consolidate at their highs, but none broke out to new highs with the broad market's rally last Friday. This time, tickers such as IVGN, CRL, OSIP, ONXX, and UTHR are good examples of bullish chart patterns that should have broken out if there was any real accumulation going on. Instead, they were little changed.

Since Friday was a holiday for a vast majority of Americans, it's fair to say that we can't place too much emphasis on the day's price action. But until we begin seeing the emergence of new leading stocks at fresh 52-week highs, it's hard to get excited about buying the market for anything more than a short-term bounce. Conversely, new short entries at current levels carry a moderately negative risk/reward level.

Open ETF positions:

Long - IDU
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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