Following through on the previous day's bullish momentum, stocks trended modestly higher throughout most of the day, but selling pressure in the final thirty minutes caused the major indices to finish near the flat line and with mixed results. The Nasdaq Composite eked out a gain of 0.1%, but the S&P 500 and Dow Jones Industrial Average slipped 0.2% and 0.3% respectively. Performance in the small and mid-cap arena was also indecisive. The Russell 2000 lost 0.3%, as the S&P Midcap 400 gained 0.2%. The Nasdaq Composite closed in the middle of its intraday range, indicative of yesterday's lack of direction. The S&P and Dow, however, settled in the bottom quarter of their ranges.

Turnover in the NYSE and Nasdaq was nearly on par with the previous day's levels. In the NYSE, total volume was 2% lighter than the previous day's level. Volume in the Nasdaq increased by 6%. In both exchanges, overall volume levels remained below 50-day average levels for the fourth straight day. Since next Monday is a holiday (Memorial Day), we don't expect to see a substantial jump in trading until at least next week.

In case you missed our initial May 6 breakout entry into U.S. Natural Gas (UNG), the ETF is presenting another ideal entry point on its current pullback. Two weeks ago, UNG broke out above its five-month downtrend line, as well as its 50-day moving average. Momentum from the upside breakout carried UNG higher into the middle of last week, at which point it began to correct by retracing a bit of its gains. Now, UNG has pulled back to key support of both its 20 and 50-day moving averages, both of which it closed just a few cents below in yesterday's session. This first pullback following the recent breakout provides a buy entry into UNG that provides a positive reward/risk ratio. We used yesterday's retracement as an opportunity to add additional shares to our winning position. The pullback to support is illustrated on the daily chart of UNG below:



On Monday, spot gold and silver pulled back substantially, but both commodities immediately snapped back in yesterday's session. The iShares Silver Trust (SLV), which has been showing more relative strength than SPDR Gold Trust (GLD) in recent weeks, fell 1.4% on Monday, but climbed 2.8% yesterday. More importantly, SLV closed at the top of its recent band of consolidation. This is shown on the daily chart of SLV below:



SLV briefly traded above the high of its consolidation in yesterday's session, then drifted lower to close within a few pennies of the $14 breakout level. As with UNG, we also added to our existing SLV position, after it rallied above the $14 level. Monday's "shakeout," followed by yesterday's immediate recovery and test of the upper channel of the consolidation, is very positive. As such, we now anticipate further SLV gains in the short-term. Our upside price target for SLV is about 8% above its current price, just over the $15 level. This correlates to resistance of the long-term downtrend line, shown on the weekly chart below:



A look at the daily charts of the S&P, Dow, and Nasdaq clearly indicate the 20-day exponential moving averages (EMAs) as the impetus behind the May 17 rally. But if the major indices now head back down to close firmly below their 20-day EMAs, overall market sentiment could very quickly revert back to favoring the bears, as it generally did last week. Going into today, we'll be closely watching the May 18 lows in the main stock market indexes, as closing prices below those lows would correlate to breakdowns below the 20-day EMAs as well. This is shown on the daily charts of the S&P, Dow, and Nasdaq:







If stocks hold above their May 18 lows for the next several days, odds are good the major indices will rally back to test their early May highs shortly thereafter. But a closing break below those lows would likely lead to a retracement down to the 50-day moving averages, especially considering the Nasdaq would have failed another attempt to convincingly reclaim its 200-day moving average. May 18 lows for the major indices are as follows: S&P 500 - 888, Dow Jones Industrials - 8,270, Nasdaq Composite - 1,690. As we said yesterday, stocks appear to be stuck in a transitional market right now. As such, it's a good idea to avoid the broad-based ETFs. Instead, one might wish to consider commodity ETFs, which generally have a low correlation to the direction of the stock market and are have been showing overall relative strength to the major indices.

Open ETF positions:

Long - SLV, UNG, FXY, TAN, IEO
Short - (none)

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.