Printing their fourth straight session of losses, the major indices concluded the week with a session of moderate losses last Friday. This time, the decline was exclusively the result of an opening gap down. Thereafter, stocks oscillated in a sideways range throughout the session. The Dow Jones Industrial Average lost 0.2%, as both the Nasdaq Composite and S&P 500 fell 0.5%. The small-cap Russell 2000 and S&P Midcap 400 indices were lower by 0.6% and 1.0% respectively. The Nasdaq finished in the bottom third of the day's range, while the S&P and Dow closed near the middle of their intraday ranges.

Total volume in the NYSE receded 12%, as turnover in the Nasdaq registered 10% lighter than the previous day's level. Nevertheless, volume remained above 50-day average levels. Market internals were negative in both exchanges, but not by an overly wide margin. In the NYSE and Nasdaq, declining volume exceeded advancing volume by a margin of 2 to 1.

In our September 30 commentary, we discussed how the major indices had moved into "no man's land," trapped between support of their prior lows from August, as well as their 20-day moving averages, and resistance of its previous week's highs. Specifically, we said, "Overall, this creates an interesting situation we view as a transitional point in the stock market. If the numerous ETFs with patterns similar to those above hold support of their September 25 lows in the coming days, it could very well lead to yet another rally to new highs of the year. But if a plethora of ETFs suddenly start closing below their September 25 lows, the stock market will be peppered with failed breakout attempts that could quickly spark a wave of downside momentum. Tests of the 50-day moving averages could very realistically follow in succession." The latter scenario is exactly what occurred in last week's session. Below are annotated charts of the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average:







Summarizing the technical state of the broad market right now, notice the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average all broke support of their "swing lows" from September 25, their 20-day exponential moving averages, and their prior highs from August. Furthemore, the Nasdaq and S&P 500 sliced through support of their primary uptrend lines off the March 2009 lows. The Dow is still slightly hanging on to its six-month uptrend line.

The silver lining to last week's sell-off is the major indices have already pulled back to support of their 50-day moving averages, as we anticipated they would do upon breaking the short-term support levels mentioned above. The last time the main stock market indexes pulled back to their 50-day moving averages was back in July of this year. When that occurred, stocks traded below their 50-day moving averages for about a week, then began reversing sharply higher. This week, we'll be closely watching the price action of the major indices to see how they behave on this test of the 50-day moving averages. If stocks appear to hold up, the current retracement provides a low-risk buying opportunity. However, the inability of stocks to hold above their 50-day moving averages would indicate a more substantial intermediate-term correction is falling into place.

Open ETF positions:

Long - DGP, UNG, FCG, DBB
Short - MOO, DUG (an inversely correlated ETF we're long)

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.