Sounding like a broken record, we have no choice but to begin today's commentary by saying yesterday's action was basically the same as each of the past three days. Stocks once again faced weakness in the first half of the session, but passed on the opportunity to move substantially lower. This time, all the major indices closed with modest losses, but still finished near the upper quarter of their intraday ranges. The Dow Jones Industrial Average slipped 0.3%, the Nasdaq Composite 0.4%, and the S&P 500 0.5%. The small-cap Russell 2000 and S&P Midcap 400 indices lost 0.6% and 0.7% respectively.

Total volume in the NYSE declined 8%, while volume in the Nasdaq similarly eased 6%. The lighter volume across the board enabled the S&P and Nasdaq from registering a bearish "distribution day." Institutional trading activity, typically the impetus behind significant moves in the market, was simply dormant. Turnover in the NYSE also fell back below average levels. Market internals were negative, but not by a wide margin. In both the NYSE and Nasdaq, declining volume exceeded advancing volume by a ratio of less than 2 to 1.

Over the past few days, we've been analyzing the charts of strong ETFs that may be buyable on a pullback. However, given the incredible intraday resiliency of the major indices, it's starting to look as though the stock market will correct by time, rather than price. All uptrending markets eventually correct, but not necessarily through means of a pullback. Whereas price retracements to technical support levels are more common ("correction by price"), very strongly trending markets sometimes correct by time instead. This occurs when the major indices consolidate in a tight, sideways range, near their highs (in uptrends), for a period of days, or even weeks. This causes the various moving averages to rise up and meet the prices, thereby triggering a resumption of the dominant trend, in the same manner that a pullback to those moving averages would generate buying interest. Corrections by time are typically marked by volatility contractions, which occur as the sideways trading range of the market narrows. On the daily chart of the Nasdaq 100 Tracking Stock (QQQQ), notice how the 10-day moving average (the dotted purple line) is now nearing the price of QQQQ. The 20-day exponential moving average (the beige line) is also steadily rising toward the price of QQQQ:



If the Nasdaq, or any of the other major indices, convincingly breaks out above the high of its range, it's unlikely the ETFs we've been stalking for pullback entries will retrace very much, at least in the near-term. If that happens, we will temporarily put our plans for pullback entries on hold. Instead, we will go with the flow by focusing on selectively buying ETFs breaking out above their consolidations as well. The only caveat is that any new entries we take will have tight stops, just below their breakout levels. This will help to protect against the possibility of "fakeout breakouts." When buying a breakout above a tight base of consolidation, we've found that tight stops are most effective in protecting against the vicious downside momentum that frequently occurs from failed breakouts. We will also subsequently trail tight stops to protect any profits that develop. In addition to QQQQ (shown above), below are the charts of a few ETFs that could be in play for short-term, momentum trades on a breakout above the highs of their recent consolidations:







In addition to the potential short-term breakout setups above, we still have the following ETFs on our watchlist for pullback entries, just in case we finally get that retracement many traders are waiting for: iShares Nasdaq Biotech (IBB), iShares Spain (EWP), iShares Malaysia (EWM), and Semiconductor HOLDR (SMH). Also, Claymore Global Solar Energy (TAN) has just pulled back to support of its 50-day MA, after recently surging above it. Unlike the major indices, TAN is still below its June 2009 high, but the ETF has begun showing substantial relative strength to the broad market over the past several weeks, making for a low-risk pullback entry just above yesterday's high of $9.97.

We concluded yesterday's commentary by saying, "Overall, the stock market has been a bit confused and nervous over the past three days. . .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." Since yesterday's action did not change the current technical picture, our overall thoughts remain the same going into today.

Open ETF positions:

Long - FXY, DGP
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.