After gapping higher on the open, stocks initially trended higher throughout the first hour of trading, but the bulls relinquished control shortly thereafter. Equities reversed course later in the morning, drifting back to the flat line by mid-day, then making another leg down, into negative territory, later in the afternoon. The Nasdaq Composite fell 0.4%, the S&P 500 0.5%, and the Dow Jones Industrial Average 0.6%. The small-cap Russell 2000 and S&P Midcap 400 indices lost 0.8% and 0.6% respectively. All the main stock market indexes closed near their intraday lows.

Turnover finally rose across the board, but the higher volume losses caused both the S&P 500 and Nasdaq to register a bearish "distribution day." Mutual funds, hedge funds, and other institutions became active on the sell side, causing total volume in the NYSE to swell 26%. Volume in the Nasdaq increased 9% above the previous day's level. In the NYSE, declining volume only marginally exceeded advancing volume, but the adv/dec volume ratio steadily deteriorated from a positive margin of more than 12 to 1 in the morning. The Nasdaq adv/dec volume ratio finished negative by 2 to 1.

In yesterday's Wagner Daily, we illustrated that iShares Silver (SLV) was breaking out above a base of consolidation. The reason we focused on a spot silver ETF, rather than a spot gold ETF, is because silver had been exhibiting relative strength silver to gold. Silver, for example, was already trading above its March 2009 high, and nearing resistance of its February 2009 high. Laggard gold, on the other hand, was still below its March 2009 high, and well below its February 2009 high as well. But while the SPDR Gold Trust (GLD) is still below those resistance levels, even after yesterday's 1.3% gain, Market Vectors Gold Miners (GDX) has clearly been showing relative strength to GLD. The difference is that GLD follows the price of spot gold, whereas the portfolio of GDX is comprised of a basket of individual gold mining stocks. On the daily charts below, notice GDX just broke out to close at its highest level in more than nine months, but GLD is still below its February and March 2009 highs:





The CurrencyShares Japanese Yen (FXY), which we've been long since April 24, rallied to close at a multi-month high yesterday. If it clears yesterday's high of $105.09, there will be little resistance to prevent it from surging substantially higher in the near-term. We'll continue to trail a stop below each "swing low" in order to maximize gains along the way. Below is a daily chart of FXY:



Weak stocks and sectors bouncing off their dead lows, rather than leading growth stocks, have largely been responsible for the broad market's rally of the past several months. The financial sector, including banks, brokers, insurance, and real estate, is one such example. From its March 2009 low to May 2009 high, the S&P Financial SPDR (XLF), a popular ETF proxy of the financial sector, more than doubled (110% gain to be exact). By comparison, the S&P 500 SPDR (SPY) rallied 36.5% during the same period.

Because the current broad market rally has largely been driven by the financial sector, one might also expect the rally to fizzle out when this sector starts to show weakness and signs of resuming its long-term downtrend again. Yesterday, such bearish divergence in the financial sector was readily apparent, and likely responsible for the afternoon sell-off in the major indices as well. Though SPY lost only 0.8% yesterday, XLF tumbled 2.6%. The weakness in the financial sector also caused the inversely correlated UltraShort Financials ProShares (SKF) to jump 4.1%, breaking out above a six-week downtrend line in the process. This is shown on the 120-minute chart of SKF below:



Notice that SKF broke out above its six-week downtrend line after forming a "higher low" on its hourly chart (circled in black). This means short-term momentum is starting to reverse in this sector, though it's obviously too early to say whether the intermediate-term bias will change as well. When SKF broke out above its downtrend line yesterday, we sent an Intraday Trade Alert to subscribers, informing them we were buying it. At the time of entry, we only intended SKF to be a daytrade, but because of how weak the sector remained in the afternoon, we made a judgment call to keep the position overnight. In today's session, we'll closely monitor price action in the financial sector to determine whether to lock in a quick, multi-point gain in SKF, or hold in anticipation of further short-term gains.

Yesterday, all the main stock market indexes formed bearish "shooting star" candlestick patterns by rallying well above their opening prices, but reversing to close below their opening prices. Not surprisingly, the bearish intraday reversal occurred as some of the major indices began testing resistance of their May highs from two weeks ago. The "shooting star" and resistance of the prior May highs is annotated on the daily chart of the Dow Jones Industrial Average below:



In yesterday's commentary, we said, "overall market sentiment could very quickly revert back to favoring the bears" if the major indices break below their 20-day exponential moving averages, which had converged with their May 18 lows. While the main stock market indexes are still above their 20-day EMAs and May 18 lows, it would only take one swift day of selling in today's session to cause a break of those key support levels. Again, we believe a closing break below the May 18 lows would likely lead to a retracement down to the 50-day moving averages, so keep an eye on those pivotal support levels in today's session. May 18 lows for the major indices are as follows: S&P 500 - 888, Dow Jones Industrials - 8,270, Nasdaq Composite - 1,690.

Open ETF positions:

Long - SLV, UNG, FXY, TAN, SKF
Short - (none, but SKF is an inversely correlated ETF)

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.