After opening slightly higher yesterday morning, the main stock market indexes traded in a narrow, sideways range throughout the first half of the day, but the bears returned at mid-day, causing stocks to slice through the previous day's lows. Subsequent range-bound trading near the intraday lows was the dominant afternoon theme, causing the major indices to sustain another day of sizeable losses. The Nasdaq Composite fell 1.1%, as the S&P 500 and Dow Jones Industrial Average registered identical losses of 1.3%. The small-cap Russell 2000 shed 1.6% and the S&P Midcap 400 declined 1.7%. All the broad-based stock market indexes closed at their worst levels of the day.

Turnover crept higher across the board, causing the S&P 500 and Nasdaq Composite to register another "distribution day," the third such day of institutional selling within the past five sessions. Total volume in the NYSE increased 2% above the previous day's level, while volume in the Nasdaq ticked 4% higher. A healthy market can typically absorb two to three days of higher volume losses within a one-month period, but the presence of more than four such days of institutional selling usually leads to a substantial market correction. Factoring in the Nasdaq's session of "churning" on June 11, the index has already registered four bearish volume patterns over the past week.

Yesterday's losses caused all the main stock market indexes to break support of their 20-day exponential moving averages (EMAs), which we pointed out in yesterday's commentary as being key areas of near-term support. The break of the 20-day EMAs also caused both the S&P 500 and Dow Jones Industrials to close below the low of their recent bases of consolidation. The Nasdaq Composite, however, only narrowly closed below its 20-day EMA, and is still holding support of its multi-week band of consolidation.

Given the numerous bouts of distribution, combined with the breaks of the 20-day EMAs, it's safe to say the stock market is now in a short-term correction mode. Nevertheless, the operative word here is "short-term," as the major indices would need to fall quite a bit further, forming "lower lows" below their May 2009 lows, before they would enter into new intermediate-term downtrends. While stocks now have a good chance of retracing down to their 50-day MAs, it's way too early to anticipate further losses below those levels. As the 50-day MAs may be an ideal place to cover any short positions and/or look for new long entries, you may want to set price alerts for the 50-day MAs in each of the major indices. The 50-day MAs currently are at the following levels: S&P 500 - 892 (2.2% below the current price), Dow Jones Industrials - 8,332 (2.0% lower), and the Nasdaq Composite - 1,726 (3.9% lower).

Though we have two short ETFs in our portfolio, both of which are showing solid unrealized gains, we're managing them with a short-term time horizon. Ideally, we'd like to take profits on the bearish positions on the stock market's next significant move down, while simultaneously looking to buy ETFs with relative strength and/or bullish chart patterns as they come into key support levels. One such ETF we're stalking for potential buy entry is PowerShares Agriculture (DBA), a commodity ETF tied to the prices of a mix of agricultural commodities futures contracts. The DBA setup is illustrated on the daily chart below:



DBA has pulled back to major support of both its 50 and 200-day moving averages, which converges with support of the "swing low" from mid-May (marked by the dashed horizontal line). Because of the extensive support near the current price, a buy entry above yesterday's high of $26.53 is relatively low-risk. Such an entry also gives us a positive reward-risk ratio on the trade, as a tight stop can be placed just below the low of the past two days (a stop of less than one point), while a realistic profit target is a test of the June 1 high (a potential gain of more than two points). As always, it's important not to "jump the gun" by buying before the actual rally above yesterday's high.

On June 8, we bought iShares Nasdaq Biotech (IBB) due to new relative strength in the sector, as well as support of its 200-day MA. Although the trade is presently showing an unrealized loss, the current price of IBB presents an ideal pullback entry point for those who may have missed our initial entry. On the daily chart below, notice that IBB appears to be finding support at its 20-day EMA, as well as major support of its prior highs from March and April of this year. If buying near the current price, a protective stop of 1 to 1.5 points should do the trick, as that would represent a breakdown below substantial horizontal price support:



The iPath India Index (INP), which we've been stalking for a pullback entry over the past few days, is approaching our "buy zone," which is a test of the 20-day EMA and "swing low" from June 8. Unlike many ETFs, INP is still well above its 50-day MA, and its short-term consolidation has enabled support of the uptrend line from the March 2009 low to approach the current price.

Open ETF positions:

Long - SRS, MZZ, UNG, IBB, SLV
Short - (none, but SRS and MZZ are inversely correlated ETFs)

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.