Initially building on the momentum of the previous session's late-day reversal, stocks moved higher throughout the first half of yesterday's session, but drifted back down and into negative territory in the afternoon. The Nasdaq Composite slipped 0.7%, the S&P 500 0.9%, and the Dow Jones Industrial Average 1.0%. The small-cap Russell 2000 fell 1.1%, as the S&P Midcap 400 declined 0.7%. Although the the broad market finished with substantial losses, the major indices only retraced half of the sharp move off the February 5 lows. Opposite of the previous day, the main stock market indexes finished at their intraday lows.

One silver lining of yesterday's negative session is that turnover eased substantially. Total volume in the NYSE declined 31%, while volume in the Nasdaq was 28% lighter than the previous day's level. Faster trade would have pointed to institutions immediately selling into strength of last Friday's bounce. Instead, lower turnover indicated the losses were more due to a lack of buying, the bulls taking a rest, rather than an abundance of selling. In the NYSE, declining volume exceeded advancing volume by a margin of just over 3 to 1. The Nasdaq adv/dec volume ratio was negative by only 2 to 1.

Now that the stock market is clearly in correction mode, fixed-income (bond) ETFs have started seeing buying interest. One bond ETF setting up nicely for a bullish, intermediate-term trend reversal is iShares 20+ Year Treasury Bond Fund (TLT). We've annotated the daily chart of TLT below:



Over the past three weeks, TLT has been trading in a sideways range, right in the vicinity of its 50-day moving average (the teal line). On February 3, TLT gapped down to "undercut" support of its short-term range, which had the effect of shaking out the "weak hands." The following day, TLT snapped back into its prior range, and the prior day's "undercut" had the positive effect of absorbing supply. Now, TLT has stealthily crept above its 50-day MA, and is poised to break out above a clearly defined horizontal resistance level at the $92.40 area (the dotted red line). If it does, the breakout above the short-term range will correlate to a more significant breakout above its four-month downtrend line (the dashed blue line), which began with the October 2009 high. As such, we like TLT for potential buy entry above the $92.50 area, with a protective stop below the February 3 low. As a side benefit to anticipated capital gains, TLT also pays monthly dividends of approximately 30 cents per share.

Yesterday, we said the broad market may move higher in the short-term, but would subsequently run into formidable resistance levels that could send stocks back down in the intermediate-term. Therefore, the reward-risk ratio of entering new short positions at current levels may not be very positive. However, it may be a good idea to start building a watchlist of potential short candidates if/when the bounce off the February 5 lows stalls. One bearish setup we like is the S&P Retail SPDR (XRT). The daily chart is shown below:



Last month, XRT reversed lower after failing to break out above resistance of its prior highs from October 2009. Compared to the main stock market indexes, which were trading at fresh 52-week highs last month, XRT has been showing intermediate-term relative weakness. After trading in a sideways range for the past five months, XRT may finally be positioned to move out of that range, but to the downside. The February 5 low of $34.11 perfectly aligns with horizontal price support from late November/early December of 2009. If XRT falls below that level, bearish momentum could carry it substantially lower in the near-term. However, as with all technical setups, remember the importance of not "jumping the gun" with a premature short entry before the actual break of support.

Open ETF positions:

Long - UUP, MDY
Short (including inversely correlated "short ETFs") - SRS

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.