Drifting lower in a choppy session, stocks wrapped up a volatile week on a moderately negative note. The Nasdaq Composite slipped 0.5%, as the S&P 500 and Dow Jones Industrial Average posted identical declines of 1.0%. The small-cap Russell 2000 and S&P Midcap 400 indices lost 0.5% and 0.8% respectively. All the major indices closed near their lows of the day, but intraday price action was range-bound. For the week, the Nasdaq shed 3.6%, the S&P 500 4.8%, and the Dow Jones Industrial Average 5.2%.

As is commonly the case ahead of holiday weekends, turnover eased substantially. Total volume in the NYSE declined 16% below the previous day's level, while volume in the Nasdaq receded 19%. It was positive that stocks averted a "distribution day," but there have still been several occurrences of institutional selling in recent weeks. Market internals were negative, but not by a wide margin. In the NYSE, declining volume exceeded advancing volume by a ratio of 5 to 2. The Nasdaq adv/dec volume ratio was negative by just under 3 to 2.

Last Thursday, the Dow Jones Industrial Average undercut the lows of its month-long consolidation on an intraday basis, then reversed to close at its intraday high, forming a bullish "hammer" candlestick in the process. This, and similar price action amongst all the main stock market indexes, was initially encouraging. However, between the following day's losses and the lower opening indicated in today's pre-market session, the broad market is once again in danger of breaking down. Going into today, the intraday lows of February 12 are key support levels the major indices must hold above. If not, bearish momentum could quickly cause the broad market to break down to new lows of the year, followed by a test of the November 2008 lows. On the daily chart of the S&P 500 below, notice how the February 12 low correlates to a mini "double bottom" with the February 2 low:



If the Dow Jones Industrials loses support of its February 12 low, there's not much to prevent the index from testing its November 2008 low, which is already a six-year low:



The Nasdaq Composite, which has been showing slight relative strength to both the S&P and Dow, will break support of its multi-month uptrend line if it loses support of its February 12 low, though it could still easily hold its January lows:



Until we see whether or not the major indices hold support of last week's lows, there's not much point in looking at possible bullish ETF setups within the various industry sectors. This is because closing prices below those lows will change the short and intermediate-term trend biases to "bearish," thereby changing our overall sentiment to the short side for new trade entries.

We have a few long positions that are likely to feel some pressure with today's opening gap down, but the good news is that gold and silver are trading sharply higher in the pre-market. Spot gold, for example, is poised to open today's session at a fresh seven-month high. This should enable our long position in Gold Double Long (DGP) to hit its original price target of $21.70, locking in a very large gain in the process. Because gold and silver are so susceptible to overnight "gaps," we prefer to sell DGP into strength, rather than trail a tight stop. Nevertheless, gold technically has the potential to move substantially higher in the intermediate to long-term, so we'll look for a re-entry point after gold starts to catch its breath and consolidate or pull back.

Open ETF positions:

Long - DGP, GDX, IBB, INP, EWZ
Short - (none)

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and Morpheus Trading Group, a trader education firm launched in 2001 that provides daily technical analysis of the leading ETFs and stocks. For a free trial to the full version of The Wagner Daily or to learn about Wagner's other services, visit MorpheusTrading.com or send an e-mail to deron@morpheustrading.com.