Fully recovering their previous day's losses and then some, stocks followed the opposite pattern of last Friday's action. The major indices gapped lower on the open, then reversed to trend steadily higher throughout the day. The Nasdaq Composite climbed 0.9%, the S&P 500 0.5%, and the Dow Jones Industrial Average 0.4%. Small and mid-cap stocks reclaimed center stage, as the Russell 2000 gained 1.3% and the S&P Midcap 400 rose 1.1%. A slight pullback into the close prevented the main stock market indexes from closing at their best levels of the day, though they still finished in the upper quarter of their intraday ranges.

Not surprisingly, volume eased from the frenzied pace of last Friday's "quadruple witching" session. Total volume in the NYSE receded 51%, while volume in the Nasdaq was 20% lighter than the previous day's level. Given the distorted effect of quadruple witching, it's difficult to know whether or not there was institutional accumulation yesterday. However, turnover in both exchanges fell back below 50-day average levels. In the NYSE, advancing volume exceeded declining volume by approximately 5 to 2. The Nasdaq adv/dec volume ratio was moderately better.

Yesterday morning, S&P Metals and Mining SPDR (XME) gapped down to open approximately one point below the previous day's close. Because it had fallen so sharply over the preceding two days, we made a judgment call to cover our short position into weakness of the opening gap down, thereby locking in a quick gain of more than 3 points. An "undercut" of the 20-day EMA on yesterday's open was another reason we covered. Total holding time of the trade was less than three days. As originally explained at the time of entry, XME short was intended to be a very short-term, countertrend trade, merely seeking to take advantage of a pullback from overextended price action. As such, we simply followed our plan by taking the quick profit yesterday. The daily chart below shows our initial March 17 short entry (due to the bearish "shooting star" candlestick) and March 22 exit into weakness.:



In the broad market, overall price action and high volatility of the past two days is reflective of a market that's becoming increasingly confused. In the Nasdaq Composite, for example, we observed a very unusual pattern on the daily chart -- a "bearish engulfing" candlestick, immediately followed by a "bullish engulfing" candlestick. This is annotated on the chart below:



A "bearish engulfing" candlestick occurs when the price opens above the previous day's high and closes below the previous day's low. The pattern gets its name from the day's price action completely "engulfing" the prior day's trading range. This pattern frequently leads to lower prices in the short-term, as traders who bought the opening gap above the prior day's high quickly become trapped when price falls below support of the prior day's low. But this time, the Nasdaq followed up the bearish pattern by gapping down below the prior day's low, then rallying intraday to close all the way above the high of the rather wide-ranged bearish engulfing candlestick. Such back-to-back action is rare, and can only indicate we're now dealing with an indecisive, volatile market. What's next? Perhaps an even bigger "bearish engulfing" candlestick that wipes out yesterday's "bullish engulfing" pattern? Doubtful, but certainly not out of the question, given the current environment.

Given the apparent tug-of-war between the bulls and bears over the past two days, this may be a good time to stay on the sidelines until the market figures out its next move. For professional traders, there are occasional periods when cold hard cash is clearly the best position. Right now may be one of those times. Now that we've closed the XME position for a solid profit, our sole open position is the U.S. Dollar Bull Index (UUP). Since it's a currency ETF, UUP has a low correlation to the direction of the broad market. Such positions can be ideal alternatives to periods when cash is the only other choice that makes sense. As a fixed-income ETF, iShares 7-10 Year T-bond (IEF) is another ETF that has the benefit of not being tied to the broad market's newfound indecision. As per our March 19 commentary, we still like IEF for buy entry on a breakout above the March 17 high of $90.63. This correlates to a breakout above both the 200-day MA and the neckline of its current "inverse head and shoulders" pattern.

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.