The stock market took a breather from its recent upward sprint yesterday, as a round of afternoon profit taking reversed morning gains. All the major indices finished lower, but divergence among the main stock market indexes was quite evident. The Dow Jones Industrial Average slipped just 0.1% and the S&P 500 lost only 0.4%. However, relative weakness in the tech arena weighed on the Nasdaq Composite, which fell 1.9%. The small-cap Russell 2000 similarly declined 1.7%, while the S&P Midcap 400 receded 1.4%. All the major indices closed at their intraday lows.

Under the surface, the worst thing about yesterday's session was the higher volume that accompanied the pullback. Total volume in the NYSE swelled 17%. Turnover in the Nasdaq rose 3% above the previous day's level. The higher volume losses caused both the S&P 500 and Nasdaq Composite to register a bearish "distribution day," the first instance of institutional selling since the current rally began. Although an occasional "distribution day" is normal in uptrending markets, a round of higher volume losses so soon after the start of a developing rally is negative. Just one more "distribution day" this week could kill the broad market's fledgling short-term uptrend, but stocks could just as easily shake off yesterday's bearish impact of institutional selling if the major indices see another round of higher volume gains instead. We'll be closely monitoring the volume patterns of the market over the next several days, as volume is one of the few technical indicators that never lies. Furthermore, volume patterns tend to predict price, making volume analysis a leading, not lagging, indicator.

For the past week, U.S. Oil Fund (USO) has been consolidating just below pivotal resistance of its 50-day moving average, holding above support of its 20-day exponential moving average. On March 9 and 10, USO probed above its 50-day MA on an intraday basis, but failed to close above it. But yesterday, USO closed just forty cents below its 50-day MA, positioning it to breakout above its 50-day MA for the first time since July of 2008. Shown on the chart below, we like USO for buy entry above the $29 area:



Another commodity ETF that may be in play this week is DB Commodity Index Tracking Fund (DBC). After forming a base at its lows over the past month, DBC rallied to close just above the high of that month-long consolidation yesterday. If it gains another thirty cents in today's session, DBC will have also moved above its 50-day MA. This would break the intermediate-term downtrend line, shown on the daily chart below:



A scan of several hundred ETFs last night revealed very few bullish chart patterns. Likewise, quality short setups were not that plentiful either. Specifically, the issue is that last week's rally caused a majority of stocks and ETFs to move into "no man's land," trapped between resistance of their intermediate-term downtrend lines above, and support of their short-term hourly uptrend lines below. Since longer-term trend lines hold more weight than shorter-term trend lines, and the intermediate-term downtrends have not yet reversed, aggressively buying at current levels would carry a negative reward-risk ratio. Conversely, since short-term sentiment has definitely changed over the past week, we're not yet thrilled with the idea of new short positions into the current upward momentum. The daily chart of the S&P 500 below illustrates the present "no man's land" position of the index:



Overall, our plan remains the same as we've been detailing for the past several days. We simply want the market to prove its ability to recover from a downside correction of the current short-term rally, something it's been unable to do in past months. If the major indices register another day of losses today, but subsequently rally back to their preceding highs later in the week, better buy setups should start to arise. If so, we would begin to enter new long positions in anticipation of a bullish reversal of the broad market's intermediate-term downtrend. In the event stocks fail to pull back any further this week, we'll at least look for a couple days of sideways price consolidation, then plan to buy a subsequent breakout above the high of the consolidation. Don't worry about missing "the bottom," as there will be plenty of opportunities to profit if the short-term rally materializes into a tradeable, intermediate-term uptrend.

Open ETF positions:

Long - DGP, SLV, UGA
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.