Stocks followed through on the previous day's bearish reversal, as the major indices gapped lower on the open, then trended south throughout most of the day. Buying interest in the final hour of trading enabled stocks to finish off their worst levels of the day, but losses were still rather sizeable. The Dow Jones Industrial Average fell 1.5%, the S&P 500 1.7%, and the Nasdaq Composite 1.9%. The small-cap Russell 2000 declined 1.6%, as the S&P Midcap 400 shed 1.8%. The main stock market indexes closed just below the middle of their intraday ranges.

Turnover eased across the board, allowing the S&P and Nasdaq to avert what could have been a second straight "distribution day." Total volume in the NYSE was 11% lighter than the previous day's level, while volume in the Nasdaq ticked 1% lower. In both exchanges, it was the sixth consecutive day of lighter than average volume. Since today's session precedes a three-day holiday weekend, trading will likely remain below average until at least next week.

Over the past several days, we've been discussing the importance of the 20-day exponential moving averages (EMAs) of the major indices as pivotal levels of short-term support. Yesterday's price action proved many other traders have been focused on the same levels. On an intraday basis, the S&P 500, Dow, and Nasdaq all dipped well below their 20-day EMAs on an intraday basis, but support of last week's lows gave an excuse for the bulls to subsequently step in. Curiously, all three indexes closed practically right on support of their 20-day EMAs, adding an extra ounce of wonder as to the short-term direction of stocks. This is illustrated on the daily charts of the three major indices below:







Because the main stock market indexes closed just a few points below their 20-day EMAs, after trading well below those moving averages earlier in the session, the bulls apparently worked hard at the end of the day to try to push the major indices to close above that pivotal level of support. Since the 20-day EMAs have perfectly provided price support on numerous occasions since the current uptrend began, the bulls are aware of the implication that a closing break of the 20-day EMAs could spark a wave of selling, at least in the short-term. Therefore, going into today, just keep an eye on yesterday's lows in the broad-based indexes. We would be concerned about holding long positions over the holiday weekend if the S&P, Dow, or Nasdaq closes below yesterday's low.

Because today's session precedes a long, holiday weekend, we expect trading to be light, especially in the afternoon. As such, it's probably not a good idea to initiate new position on either side of the market. Light volume days are notorious for being choppy and indecisive, so it may be better to hold off on any new trade ideas until next week. At that time, we'll take an updated look at which sectors and ETFs have showed the most relative strength during the market's recent pullback, as well as those that could continue lower, even if the market finds support.

The U.S. stock markets are closed on Monday, May 25, in honor of Memorial Day holiday. As such, The Wagner Daily will not be published that day, but regular publication will resume the following day. Enjoy the long weekend!

Open ETF positions:

Long - SLV, FXY, 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.