Following a similar pattern to the previous day's session, stocks finally appeared to be headed for a correction throughout the morning, but the major indices shrugged off most of the early weakness to close with mixed results. The Nasdaq Composite advanced 0.4% and finished at a fresh, ten-month closing high. Down as much as 1.3% at its intraday low, the S&P 500 Index recovered to lose just 0.3%. The Dow Jones Industrial Average was off by just 0.1%. The small-cap Russell 2000 settled 0.2% higher, while the S&P Midcap 400 declined by the same percentage. The Nasdaq closed near its best level of the day, as the S&P and Dow finished around the upper quarter of their intraday ranges.

Total volume increased 4% in the NYSE and 19% in the Nasdaq. On the surface, the intraday price action of the broad market resembled the prior day's pattern. However, a deeper look beneath the surface reveals a bit of bearishness in the volume pattern of the NYSE. The sharp increase in volume, combined with slight closing losses in the S&P and Dow, indicates the presence of "churning" yesterday. Churning occurs when institutions sell into strength, near the highs of a recent move. This enables their selling to be rather stealth, as the losses on churning days are usually minimal to nill. Since the major indices are in a consolidation pattern right now, lighter volume would have indicated the bulls were merely taking a rest, and the bears were staying in hibernation. Nevertheless, given the market's incredible rally of the past few weeks, a bit of selling into strength is to be expected. At this point, a single session of churning is not cause for alarm.

Yesterday, we illustrated that iPath India Index (INP), a leading international ETF since the rally off the March lows began, was setting up for another breakout to a new high. Upon scanning the rest of the international ETFs, we noticed iShares Spain Index (EWP) has been exhibiting impressive relative strength over the past few weeks. While the U.S. markets have been deliberating over the past few days, EWP has continued higher; it has gained in each of the past six sessions. As such, EWP is now on our radar screen for potential entry on the first pullback to support. The daily chart of EWP is shown below:



As we've discussed in recent days, the 10-day moving average is an ideal place to enter very strongly trending ETFs on a pullback. Presently, the 10-day moving average of EWP is at the $42.68 level. One point below that is the 20-day exponential moving average, a more significant area of support to buy a pullback. Even better is that support of the breakout above the June 2009 highs of EWP (the dashed, horizontal line) is just a few cents below the 20-day EMA. Therefore, we're interested in buying EWP on a pullback to the area between its 10 and 20-day moving averages, around $41.70 to $42.70.

Further east on the globe, iShares Malaysia (EWM) is showing nearly as much relative strength as iShares Spain. We like EWM for potential buy entry on a pullback to the $9.25 to $9.45 area:



In yesterday's newsletter, we looked at potential breakout plays in GDX and INP, as well as a possible pullback setup in IBB. Of those three, GDX may temporarily be removed from the watchlist, as it broke firmly below support of its 50-day MA yesterday. Since it never hit our trigger price for entry, there was no harm done. That leaves us with the following ETFs on our watchlist for possible buy entry: INP for breakout entry, and SMH, IBB, EWP and EWM for pullback entries.

Overall, the stock market has been a bit confused and nervous over the past three days. With the exception of yesterday's churning in the S&P and Dow, we've not yet seen any clear instances of selling into strength of the market's incredible move of the past few weeks. Still, the bulls have been getting nervous on the market's open each day, only to regain their confidence later in the day. With such indecisive and choppy price action, a sharp move could be on tap in the near-term. But in which direction, you might ask? Frankly, either direction wouldn't surprise us. A substantial pullback would not be out of the norm, and would certainly be healthy for the longer-term of the market's current rally. Yet, with no significant overhead resistance to contend with near current levels, the major indices could just as easily rocket higher again. This is a good time to be alert, keeping your left hand on the sell button, and at least a few fingers of your right hand on the buy button.

Open ETF positions:

Long - DGP, FXY
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.