Getting off to a negative start, the major indices gapped substantially lower on yesterday's open, then chopped around in a horizontal range throughout the entire session. Stocks finished with significant losses, but the broad-based decline was fully the result of losses sustained in the opening minutes of trading. The Nasdaq Composite fell 0.8%, as both the S&P 500 and Dow Jones Industrial Average shed 1.0%. The small-cap Russell 2000 and S&P Midcap 400 indices lost 1.0% and 0.8% respectively. The S&P and Dow closed around the bottom quarter of their intraday ranges. The Nasdaq settled just below the middle of the day's range.

The most negative facet of yesterday's trading was higher turnover across the board. Total volume in the NYSE increased 11%, while volume in the Nasdaq was 5% higher than the previous day's level. The losses on higher volume caused both the S&P 500 and Nasdaq Composite to register another bearish "distribution day." In both indexes, it was the fifth such day of institutional selling within recent weeks. A healthy market can typically absorb the pressure of a few days of selling amongst mutual funds, hedge funds, and other institutions, but five or more "distribution days" within a one-month period often leads to a substantial correction in the broad market. Nevertheless, there have been a few "accumulation days" (higher volume gains) within this period, and most of the "distribution days" have occurred on lighter than average volume. However, the five "distribution days" are still a yellow warning flag to astute bulls.

Yesterday, we closed two of our three open positions, both for nice gains. The first was our short position in Oil Service HOLDR (OIH), which we closed for a gain of more than 8 points in just a five-day period. We originally sold short OIH after it fell below support of its weekly uptrend line, as well as its 50-day moving average, then failed to recover back above it. We took profit on the trade yesterday, when OIH hit our original downside price target of $110.60. The daily chart of OIH below shows our entry and exit point:



The other trade we closed yesterday was our short position in Regional Bank HOLDR (RKH). It seems the relative weakness that has been holding down the financial sector may be diminishing. RKH also came into support of its recent lows on the daily chart, so that gave us another reason to take profits on the trade. We locked in a gain of more than 2 points on the RKH short trade, but we will continue to monitor the action in the financial sector for potential short re-entry, depending on market conditions.

The Semiconductor HOLDR (SMH), which we've been stalking for potential buy entry, pulled back slightly yesterday, but we'd still like to see a retracement down to the area of its breakout level (around $26.35) before buying. Of course, there's the possibility such a pullback may never come, but we're not inclined to chase long entries in the current market environment. Waiting for stocks and ETFs to come to our intended entry prices, and passing on them if they don't, enables one to more easily control risk in the currently choppy conditions. The potential buy entry into SMH is shown on the daily chart below:



We recently bought First Trust Natural Gas Index (FCG) when it broke out above a month-long downtrend line, but sold it for a small loss when it failed to follow-through to the upside. Now, FCG is actually looking like a potential short setup. Take a look:



If FCG breaks below yesterday's low, it will lose support of a significant area of horizontal price support. If that occurs, the next area of support is around the $14 level. In that area, there is support of the 200-day moving average, as well as the weekly uptrend line from the March 2009 lows. Because the potential profit target for a short entry into FCG is relatively small, this setup should only be considered by short-term traders. Furthermore, it's crucial that a short entry is not attempted unless FCG breaks below yesterday's low. Since there is big support at the current price level, FCG could just as easily zoom higher from its current price, if yesterday's low holds up.

Despite yesterday's losses, the S&P 500 remains stuck in the same sideways range of the past four weeks. Although the index slipped below support of its 20-day exponential moving average yesterday, the S&P is now approaching lower channel support of the recent range, around the 1,086 area. More important support of the 50-day moving average also lies just below the lower end of the range, at the 1,080 level. Check out the short-term hourly chart of the S&P 500 below:



Notice how the S&P is once again approaching the lower channel support of its recent range. This implies the broad market is no longer short-term "overbought." As such, odds may favor an upward bias over the next few days. However, all bets are off on the long side of the market if the S&P convincingly breaks down below the lows of its month-old trading range. We continue to believe the best overall plan of action right now is for short-term traders to be positioned lightly on both sides of the market. Intermediate-term traders may prefer to simply wait on the sidelines for broad market trend resolution in either direction.

Open ETF positions:

Long - IBB
Short (including inversely correlated "short ETFs") - (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.