As is frequently the case on monthly options expiration days, last Friday's session was indecisive and non-committal, causing the broad market to finish near the flat line. Not surprisingly, news of the Fed's surprise increase in the discount rate sparked a negative knee-jerk reaction on the open, but the weakness was short-lived. Stocks recovered to unchanged levels within the first hour of trading, then continued higher into mid-day. However, the major indices drifted back down in the afternoon before closing slightly higher. The S&P 500 rose 0.2%, as the Dow Jones Industrial Average and Nasdaq Composite eked out matching gains of 0.1%. Small and mid-caps showed a touch of relative strength, a positive sign for the overall market. The Russell 2000 and S&P Midcap 400 indices climbed 0.3% and 0.5% respectively. The main stock market indexes closed near the upper third of their intraday ranges. For the week, each of the main stock market indexes advanced approximately 3%, but all but one session (last Friday) rose on flat to declining volume.

Total volume in the NYSE ticked 4% higher, while volume in the Nasdaq increased 17% above the previous day's level. Yet, volume in both exchanges were merely on par with 50-day average levels. Since the major indices were nearly unchanged, the faster trade was of little consequence. Furthermore, higher turnover is commonly prevalent on options expiration Fridays. Market internals were roughly flat, as advancing volume in both exchanges matched declining volume.

SPDR Gold Trust (GLD), an ETF that tracks the price of the spot gold commodity, is forming an interesting pattern that may be buyable. The setup is illustrated on the daily chart of GLD below:



After rallying to a fresh all-time high in December of 2009, GLD entered into an intermediate-term correction that lasted just over two months. In early February, GLD "undercut" support of its prior swing lows, around the $105 level, then quickly snapped back into the prior range. On February 16, GLD gapped up above resistance of its intermediate-term downtrend line (the dashed blue line), as well as its 50-day moving average. Since then, it has been consolidating in a very tight range, right above key support of its 50-day moving average. With the intermediate-term downtrend line now broken, a rally above the high of last week's range could lead to a resumption of the dominant, long-term uptrend. As such, we like GLD for buy entry above the $110.50 area.

In our February 16 commentary, we also discussed the bullish reversal pattern that was developing in GLD. However, we warned that, "one legitimate cause for concern with this setup is the bullish trend of the U.S. Dollar Bull Index (UUP). Gold often, but not always, moves inversely to the direction of the U.S. dollar. " In recent months leading up to February, there has indeed been a close, inverse correlation between UUP and GLD. But based on price action of the past two weeks, a new cycle may be developing where GLD continues to act well, despite a strengthening U..S. dollar. Last Friday, for example, UUP closed at its highest level since July of 2009. Yet, GLD was seemingly unaffected, as it continued to consolidate in a narrow, sideways range near its recent highs. The decreasing inverse correlation is shown on the percentage change chart of UUP versus GLD below (showing the past two weeks).



One of the weakest ETFs during the January to February correction was PowerShares Base Metals (DBB). While the main stock market indexes retraced less than 10% from their mid-January peaks to February 5 troughs, DBB tumbled more than 20%. Now, the major indices have retraced approximately two-thirds of their recent losses. DBB has recovered just over half of its decline from the high. DBB is also bumping into its 50-day moving average. Because it has so much overhead supply and relative weakness, DBB may be a good ETF to sell short if, and only if, the broad market starts heading back down. The daily chart of DBB is shown below:



In last Friday's commentary, we illustrated that the S&P 500 was trading at convergence of its 61.8% Fibonacci retracement and 50-day moving average. Since the index followed up with a nominal gain of just 0.2%, that same major area of resistance remains in effect going into today. Since stocks finished near the flat line, and it was an options expiration day, we view last Friday's session as relatively uneventful. Although stocks are managing to show considerable resilience since rallying off their February 5 lows, a significant portion of overhead supply remains. Since the correction that started in January has already been more prolonged than other pullbacks since the rally off the March 2009 lows began, one must be prepared for the possibility of at least another "shakeout" or two before stocks make it back to their 52-week highs.

Open ETF positions:

Long - UUP
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.