Like the previous day, moderate morning weakness was followed by equally subdued afternoon buying interest. However, this time the major indices were unable to recover back into positive territory. The S&P and Dow held up the best, as each index slipped just 0.1% A bit of selling pressure amongst large-cap tech stocks caused the Nasdaq Composite to show relative weakness. Halving its earlier intraday loss by the closing bell, the Nasdaq finished 0.5% lower. The small-cap Russell 2000 and S&P Midcap 400 indices eased 0.4% and 0.5% respectively. While the S&P and Dow closed near their best levels of the day, the Nasdaq only managed to settle just above the middle of the day's range.

On the surface, yesterday's percentage losses were mild, but higher volume in both exchanges pointed to stealth institutional selling into strength. Total volume in the NYSE ticked 10% higher, while volume in the Nasdaq rose 5% above the previous day's level. Since the actual decline in the S&P was so small, it would be misleading to label the session as a "distribution day." However, one could accurately say the session was marked by "churning." This occurs when, after an extended rally, turnover increases, but prices remain little changed. "Churning" is bearish because it points to a market getting heavy under its own weight, but it does not necessarily imply a correction is just around the corner, especially if the churning is followed by a day of higher volume gains.

Since we looked at a few long setups in yesterday's newsletter, here are the charts of a few ETFs that have the potential to show downside leadership IF yesterday's "churning" leads to further selling in the near-term. First is the daily chart of iShares DJ Transportation Average (IYT). Those of you familiar with "Dow Theory" may find this chart of IYT to be rather interesting:



Although IYT has rallied alongside of the major indices so far this month, it has shown slight relative weakness by remaining below resistance of its prior "swing high" from mid-October. Furthermore, that mid-October high correlates to resistance of the prior high from mid-September. It appears IYT is now at a pivotal "make it or break it" level, the outcome of which will have a significant impact on overall sentiment of the S&P and Dow. If IYT clears this key area of horizontal price resistance, it's probably buyable and good for another leg higher. But if it's going to stall and start heading back down again, this is where it would do it.

Another ETF at a pivotal "make it or break it" level is iShares Nasdaq Biotech Fund (IBB). A downside leader during the recent correction that began in mid-October, IBB has since recovered off its lows, but is now contending with resistance of its 50-day moving average. For the past six days, IBB has been trading around both sides of its 50-day MA, so it may soon resolve itself in one direction or the other. Watch for a breakout of the range (either higher or lower) in the near-term:



On the international front, the Japanese Nikkei 225 Index finds itself in a rather precarious position. The daily chart of iShares Japan Index Fund (EWJ), which has a similar pattern to the Nikkei, is shown below:



In yesterday's commentary, we discussed potential long setups for three different ETFs: S&P Homebuilders SPDR (XHB), DB Agriculture Double Long (DAG), and U.S. Oil Fund (USO). Of the three, both DAG and USO triggered the buy entry points we were monitoring (XHB remains on the watchlist). As per the plan, we bought USO when it rallied above the upper channel of its four-week downtrend line. But since we wanted to "be right or be right out," we subsequently scratched USO for a loss of 40 cents when it failed to hold above the trigger price for more than an hour or so. Still, we'll keep USO on our watchlist for another possible breakout attempt in the near future. As for DAG, we bought it on the breakout above the November 17 high, which correlated to a breakout above its prior "swing high" from late December. It closed about 30 cents below our entry point, but at short-term support of its 20-period exponential moving average on the hourly chart. Regional Bank HOLDR (RKH), one of the weakest ETFs throughout the market's recent rally, suddenly began showing relative strength yesterday, causing our short position to move against us. Nevertheless, there's still a lot of overhead supply for the sector to contend with, and the 50-day moving average is just overhead as well.

In each of the past two days, both the S&P 500 and Nasdaq Composite have printed "inside days." This means their intraday trading ranges of November 16 and 17 were completely contained within their respective intraday ranges of the November 15 session. If this pattern occurs mid-trend, it doesn't really indicate much of anything. However, when this pattern occurs after an extended rally, it signals indecision, which sometimes precedes a reversal. Yesterday's "churning" was another reason the bulls may wish to be cautious; but, then again, this market has an interesting habit of continually throwing caution to the wind...until it eventually doesn't.

Open ETF positions:

Long - DAG
Short (including inversely correlated "short ETFs") - RKH

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.