Like the previous day, most of the main stock market indexes finished near unchanged levels yesterday, but intraday price action was opposite of the prior day's session. Stocks got off to a lower start, chopped around in a sideways range throughout most of the session, then rallied into positive territory in the final hour of trading. A pullback in the final minutes of trading caused the major indices to surrender their gains, but they still closed near the upper third of their intraday ranges. The Dow Jones Industrial Average was flat, the S&P 500 edged 0.1% lower, and the Nasdaq Composite declined 0.4%. The small-cap Russell 2000 fell 1.1%, as the S&P Midcap 400 lost 0.7%.

Mutual funds, hedge funds, and other institutions were on the sidelines yesterday, as indicated by lighter turnover across the board. Total volume in the NYSE declined 11%, while volume in the Nasdaq receded 14%. It was the sixth straight day of decreasing volume in the NYSE. Curiously, it's also been six days since the S&P 500 moved above its 200-day moving average. This tells us institutions have, so far, not been convinced by the S&P 500's recovery above its 200-day MA. Rather, the big money seems to be taking a "wait and see" approach to the market. Until we see a steadily trending day backed by strong volume, indecision is likely to be the dominant theme in the stock market.

The Biotech Index ($BTK) has stealthily started to exhibit early relative strength to the broad market over the past week, and is staring to see the inflow of institutional sector rotation. The sector has been stagnant for quite a while, but that may be starting to change. On the daily chart of the $BTK index below, notice how the index is now forming a "bull flag" pattern, after breaking out above a significant area of horizontal price resistance last week:



The bullish pattern in the $BTK index prompted us to buy iShares Nasdaq Biotech (IBB) yesterday, as it came into support of its 200-day moving average. On its longer-term weekly chart, notice that IBB just broke out above a 10-month downtrend line as well:



Yesterday, we looked at the setup in PowerShares Base Metals (DBB), which was setting up for a potential breakout. That ETF, which di not yet trigger for long entry, remains on our watchlist going into today. Another commodity we're monitoring for a possible short-term breakout play is Crude Oil. There are several different ETF families that track the price of crude oil (USO, OIL, UCO, DXO, OLO), but they all have similar chart patterns. Of these, the leveraged PowerShares Crude Oil Double Long (DXO) usually tracks the closest to the actual price movement of crude oil futures contracts. Although it's a low-price ETF, it trades an average daily volume of more than 27 million shares. The daily chart of DXO is shown below:



Since beginning its uptrend in the beginning of May, DXO has been steadily moving higher, finding support at its 10-day moving average (the dotted black line) along the way. Over the past week, DXO has entered into a very tight, short-term consolidation pattern at the high of its recent trend. This creates the potential for a quick, momentum-based breakout play if DXO gaps above the high of the range (over yesterday's high of $4.61). We believe, however, that any breakout in DXO is best treated merely as a short-term trade (approximate holding time of 2 to 5 days). This is because crude oil is becoming a bit extended away from its 50-day moving average (38% above it), and also has a tendency to be whippy and volatile. If buying a breakout in DXO, or any of the crude oil ETFs, keep a tight initial stop below the breakout level, then trail it higher on the first move up. A stop below the 20-period exponential moving average (EMA) on the hourly chart often works well for trailing stops on short-term breakout plays.

In yesterday's commentary, we illustrated how both SPDR Gold Trust (GLD) and iShares Silver Trust (SLV) were setting up for buy entries on pullbacks to their 20-day EMAs. Not surprisingly, both ETFs gapped down to support of their 20-day EMAs in the morning, then reversed to close near their intraday highs. The daily charts below are a good example of how strongly-trending ETFs can be bought on the first pullback that kisses the 20-day EMAs:





The opening gap down in precious metals triggered our buy re-entry into SLV, which we just sold for a 19% gain last week. GLD followed the same intraday pattern as SLV; however, like we said yesterday, SLV has been showing more relative strength than GLD.

Based on the declining volume patterns and choppy intraday price action, it's apparent the broad market is in a state of indecision right now. Rather than speculating on which direction the major indices will go from here, consider focusing on ETFs with a low correlation to the broad market instead. That's one of the reasons we've primarily been focused on commodity ETFs, which also happen to be acting well. We'll also be closely monitoring follow-up price action in the biotech sector, to determine whether the current display of relative strength is likely to be sustainable.

Open ETF positions:

Long - SLV, IBB
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.