The main stock market indexes gapped approximately 1% lower on the open, but stocks shook off early weakness to finish near the flat line and with mixed results. The S&P 500 advanced 0.3%, the Nasdaq eked out a gain of 0.1%, and the Dow Jones Industrial Average slipped 0.3%. The small-cap Russell 2000 and S&P Midcap 400 indices both finished less than 0.1% lower. Most of the major indices closed in the upper quarter of their relatively narrow intraday ranges. The Dow settled just above the middle of its range.

Turnover eased substantially, indicating institutions were on the sidelines in yesterday's quiet session. Total volume in the NYSE declined 20%, while volume in the Nasdaq was 15% lighter than the previous day's level. Trading in both exchanges fell back below average levels. Market internals were mixed. In the NYSE, advancing volume exceeded declining volume by a margin of 2 to 1. The Nasdaq adv/dec volume ratio was fractionally negative.

The U.S. dollar sold off yesterday, causing several currency ETFs to break out above short-term resistance levels. One of those was PowerShares U.S. Dollar Bear (UDN), which we have been long since March 25. The daily chart of UDN is shown below:



On March 18, UDN surged higher to break out above resistance of its 50-day moving average (the teal line). After moving higher the following day, UDN subsequently began building a base of consolidation, holding above new support of both its 20 and 50-day moving averages. This caused a multi-week downtrend line to form on the daily chart, which UDN broke out above yesterday. In the coming week, look for upside follow-through in UDN. A close above the March 19 high of $25.96 would be particularly bullish for this setup, as it would cause the intermediate-term trend to shift to bullish as well. Presently, our stop is just below the 50-day moving average, but we'll trail it higher if/when UDN makes a new "swing high."

Energy shares got off to a weak start yesterday morning, but recovered alongside of the broad market. We closed our long position in Energy Bull 3X (ERX) yesterday morning, for a small profit, after it broke below its opening 20-minute low. However, with the afternoon recovery, the sector is still poised for breakout in the coming days. Upon comparing the various energy ETFs, we've concluded Oil Service HOLDR (OIH) has been showing more relative strength than other ETFs in the sector. If it rallies above yesterday's high, it will break out above a multi-week band of horizontal price resistance, thereby triggering our buy entry. The setup is illustrated on the daily chart below: 



With the stock market in a steady uptrend for the past five weeks, there's no doubt the bulls have had the upper hand recently. But one thing we don't like is that the major indices have been rallying into quarterly earnings season, which kicks into full swing this week. This is potentially negative because optimistic expectations of earnings reports that may be better than expected are now being built into the price of stocks. This means stocks may need to report positive earnings surprises just to maintain their current prices. Otherwise, there's likely to be post-earnings selling into strength. Last night's earnings report from Goldman Sachs is a good example of this.

After the close of trading, financial leader Goldman Sachs (GS) reported 5% earnings growth, more than double Wall Street's expectations. Yet, despite rising 5% in the regular session, GS was trading more than 2% lower in the after-hours session. This is easily explained by the fact that GS has been steadily rising for weeks. Conversely, if GS had not already been rallying so strongly, last night's earnings report would likely have been followed by higher prices after-hours.

Johnson and Johnson (JNJ) is slated to report before today's open, while chip giant Intel (INTC) will announce their latest results after today's close. On Thursday morning, banking behemoth JP Morgan Chase (JPM) will detail their quarterly results, while Google (GOOG) will do so after Thursday's close. Numbers from General Electric (GE) and Citigroup (C) are on tap for Friday's session. Of course, hundreds of other companies will also report this week.

There's been no technical reason to suggest it's time to jump back on the short side of the market, and we're not recommending such action. However, given that most companies have been rallying into earnings, it pays to be very cautious over the next few weeks, especially with nearby resistance of the February highs in the S&P 500 and Dow Jones Industrials (as illustrated in yesterday's commentary). If you own individual stocks, be sure to know when they will report earnings, lest you potentially be blindsided. Our general policy is to exit individual stocks ahead of earnings reports, but this is less of a concern with the benefit of diversification provided by ETFs.

Open ETF positions:

Long - HHH, TAN, UGA, USO, UDN, SLV
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.