Yesterday's session was relatively uneventful, as the major indices traded in a tight range throughout the entire day before finishing modestly higher. Stocks attempted to stage a rally just after mid-day, but buying enthusiasm quickly dried up, causing the broad market to drift back down in the final hour of trading. The S&P 500, Nasdaq Composite, and S&P Midcap 400 indices each gained 0.3%. The Dow Jones Industrial Average rose just 0.1%. The Russell 2000 continued to show relative weakness, causing the small-cap index to lose 0.1%. The Nasdaq Composite closed in the bottom third of the day's range, while the S&P and Nasdaq settled just below the middle of their intraday ranges.

Volume levels receded substantially, as institutional investors moved to the sidelines. Total volume in the NYSE was 30% lighter than the previous day's level. Turnover in the Nasdaq similarly decreased 27%, registering its lightest volume day in more than six weeks. Based on the lethargic pace of yesterday's trading, it appears hedge funds, mutual funds, and other institutions are taking a "wait and see" stance with regard to the stock market's next move. One positive is that market internals improved slightly from the previous day's readings. In both the NYSE and Nasdaq, advancing volume exceeded declining volume by more than 2 to 1.

The U.S. dollar lost ground to most global currencies yesterday, causing the inversely correlated PowerShares U.S. Dollar Bear (UDN) to jump 1.1%. Two days ago, on July 8, UDN neared support of its 50-day moving average, bringing the setup onto our radar screen for potential buy entry. Though we were prepared to buy an "undercut" of the 50-day MA, as a pullback entry (like we did with TLT), UDN gapped higher instead. Now, it is poised to break out above resistance of a seven-week band of consolidation. If it does, UDN will resume the uptrend that began with the March 2009 lows. The daily chart of UDN is shown below:



Another currency ETF that looks even better than UDN is CurrencyShares Japanese Yen (FXY), which just broke out above an area of horizontal price resistance two days ago. Volume that day also surged to more than 600% of its average daily level, unequivocally driven by institutional accumulation. Historically, FXY has been a rather choppy ETF that has required a wide protective stop in order to remain with the position. However, because the breakout was on such strong volume, and the following day's (July 9) price action was steady, any uptrend that develops in the short-term could be more tight-ranged. Take a look:



Over the next few days, FXY could form a "bull flag" pattern. If it does, it could be bought on a breakout above the high of the upper channel. Alternatively, FXY could also be bought on a gap down that tests the breakout level, around the $106 area. From experience, we've noticed that pullback entries into many of the currency and commodity ETFs work out much better than breakout entries, which tend to be erratic and whippy. Assuming this week's breakout doesn't fail, FXY should realistically rally back to its January 2009 high, around the $113 to $114 area.

Over the past two days, the major indices have unconvincingly attempted to rally off their intraday lows of July 8. However, despite the recovery attempt, the S&P and Dow remain below the "necklines" of their bearish "head and shoulders" patterns we've been discussing over the past two weeks. Therefore, overall price action of the past two days has simply been "noise" within the context of a bearish, intermediate-term pattern that's trying to work itself out. Nevertheless, it would be foolish to assume the stock market will smoothly follow-through in a developing downtrend, without the occasional aberration that sends the bears scurrying. Quarterly earnings season, which kicks into high gear next week, will undoubtedly add another level of volatility to the market.

Open ETF positions:

Long - DXD, SRS, INP, TLT
Short - (DXD and SRS 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.