After three straight days of steady, intraday trends (2 down and 1 up), stocks began the month of November with a session of indeterminate chop. Early strength enabled the major indices to briefly reclaim about half of the previous day's losses, but the bears resumed control at mid-day, causing stocks to erase their initial gains. A modest wave of buying in the final ninety minutes of trading enabled the main stock market indexes to finish in positive territory, but only near the middle of their intraday ranges. The Dow Jones Industrial Average gained 0.8% and the S&P 500 advanced 0.7%. However, the Nasdaq Composite edged just 0.2% higher. The S&P Midcap 400 finished 0.5% higher, but the laggard small-cap Russell 2000, which is already trading below its prior "swing low" from early October, was merely unchanged.

Unfortunately for the bulls, lighter volume prevented yesterday's gains from having the "punch" of institutional buying. Total volume in both the NYSE and Nasdaq was 6% lighter than the previous day's levels. Decreasing volume is commonplace during indecisive, non-committal sessions. In both exchanges, advancing volume was nearly on par with declining volume, indicating the bulls did not convincingly have the upper hand, despite the moderate percentage gains of the broad market.

In yesterday morning's commentary, we discussed the importance of the major indices holding above critical support of their prior "swing lows" from early October. The Nasdaq was the only index that had marginally set a "lower low" on a closing basis last week, though it grudgingly edged back above its early October low yesterday. Perhaps the biggest drag on the tech-heavy Nasdaq has been the poor performance of the Semiconductor Index ($SOX). While most industry sectors are still above their prior "swing lows," the $SOX plunged through its October 2 low last week. Since the sector is heavily weighted within the Nasdaq, this has undoubtedly been a drag on the index:



Though the S&P and Dow are still above their early October lows, the extremely weak performance of the Banking Index ($BKX) has been a drag on those indexes. Like the $SOX, the $BKX has been an anchor around the broad market's feet:



If the stock market attempts to rally again in today's session, keep an eye on the performance of these two industry sectors or related ETFs (SMH for semiconductors and KBE for banking). If the major indices try to rally, but the semis and banks don't keep pace, there's a very good chance the rally attempt will falter.

Also in yesterday's newsletter, we pointed out that all the major indices closed last week below key support of their 50-day moving averages. After yesterday's gains, the Dow reclaimed its 50-day MA, but neither the S&P 500 nor Nasdaq Composite were able to do the same. Notably, yesterday's high in the S&P perfectly coincided with new resistance of the 50-day MA. Furthermore, the sell-off that began at mid-day apparently occurred after the index bumped its head into that pivotal level. This is shown on the daily chart of the S&P 500 below:



Whereas other broad-based pullbacks since the March 2009 lows have rebounded quickly, the situation may be different this time. As we've pointed out several times recently, the combination of the numerous "distribution days" that preceded the current pullback, the major relative weakness in the small-cap Russell 2000, resistance of the two-year downtrend lines in the S&P and Dow, and the likely intermediate-term bottoming of the U.S. dollar is apparently weighing heavily on the stock market right now. Granted, the major indices are presently engaged in only short-term downtrends; so far, the intermediate-term uptrends remain intact. However, it would only require one more day of considerable selling to cause the S&P and Nasdaq to slice through crucial support of their early October lows, thereby causing the formation of "lower lows" and breaking the intermediate-term uptrends.

Again, we see no valid reason to begin jumping back on the long side of the market until we see a bit of convincing bullish action, namely the presence of higher volume gains (institutional accumulation). Since we always strive to trade what we see, not what we think, "SOH mode" (sitting on hands) remains the best plan of action on the long side. Furthermore, select short positions make sense in the near-term, just as long as they're carefully managed and entered with positive reward-risk ratios. However, new short positions at current levels are riskier unless the major indices suddenly break down below their lows of the past two days.

Open ETF positions:

Long - UUP
Short - FAZ, EDZ, TBT (all three are inversely correlated "short ETFs" 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.