The major indices concluded a positive week of trading with a session of broad-based losses last Friday, as volume levels in both exchanges ticked slightly higher. After selling off sharply in the first hour of trading, stocks attempted to recover in the afternoon, but only managed to erase about half of the earlier losses. The Dow Jones Industrial closed 0.7% lower. Both the S&P 500 and Nasdaq Composite fell 0.8%. The small-cap Russell 2000 shed 1.1% and the S&P Midcap 400 lost 0.9%. All the main stock market indexes settled near the middle of their intraday ranges.

Total volume in the NYSE ticked 4% higher, while volume in the Nasdaq was 2% greater than the previous day's level. The losses on slightly higher turnover technically caused both the S&P and Nasdaq to register a bearish "distribution day." However, as is typically the case, much of the faster pace of trading was likely attributed to last Friday being monthly options expiration day. Nevertheless, the S&P has now suffered six days of institutional selling within the past month. The Nasdaq has had three days of distribution. Even though the major indices have been acting well since bouncing off their 50-day moving averages earlier this month, the presence of five or more days within a period of three to four weeks is generally a yellow warning flag for the bulls.

In the October 14 issue of The Wagner Daily, we said, "Since the beginning of the month, fixed-income (bond) ETFs have fallen out of favor. There has been a definitive rotation out of bonds, which is pressuring many of the fixed-income ETFs. One trade setup that may soon enable one to take advantage of this rotation is a possible buy entry into UltraShort 20+ year T-bond (TBT), an ETF that is inversely correlated to the price of the long-term gov't bonds." At the time, TBT had rallied above resistance of a short-term downtrend line, as well as its 20-day exponential moving average. However, we explained it was better to wait for a rally above convergence of its 50-day moving average and four-month downtrend line before buying. Based on the price action of the past several days, TBT could break out above that level within the next several days, thereby triggering our buy entry. The setup is illustrated on the daily chart of TBT below:



Claymore Global Shipping (SEA) is an ETF we have not discussed in the past, but its pattern on the weekly chart is worthy of mention. Take a look:



The "pennant" annotated on the chart above is neither bullish nor bearish. Rather, a pennant is a continuation pattern that frequently resolves itself in the direction of the preceding trend. In this case, that was an uptrend off the March 2009 lows. If SEA rallies above last week's high of $13.79, it will break out above its prior "swing high" from mid-September, which corresponds to a breakout above the upper channel of its pennant formation. With SEA also showing relative strength to the S&P 500, funds are apparently already rotating into the shipping sector. The "percentage change chart" below shows the relative strength SEA has been exhibiting over the past two weeks:



Last Friday's sell-off in the broad market may have been sparked by less than stellar earnings results from Bank of America and General Electric. While unimpressive quarterly earnings from these companies should not have been very surprising, traders saw the reports as an excuse to engage in a bit of selling. This week, the parade of earnings reports from market-moving companies continues. Watch for the latest numbers from Apple after today's close, and earnings from Yahoo! on Tuesday evening. Also, keep an eye on the performance of the laggard Russell 2000 as a possible leading indicator for near-term stock market performance. In order to confirm recent breakouts to new highs in the S&P, Dow, and Nasdaq, the small-cap index needs to confirm the broad-based strength by zooming above its September high very soon.

Open ETF positions:

Long - FCG, USO, DBB, UNG
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.