In yesterday's commentary, we suggested it was too early to determine the actual market impact of last Friday's Goldman Sachs news, but concluded by saying, "Regardless of what happens, traders and investors should definitely be prepared for higher volatility in the coming week, as the stock market tries to sort out its next move." In that regard, the price action of the major indices did not disappoint, as volatility and indecision was the dominant theme of yesterday's trading. Stocks opened lower, reversed initial losses one hour later, turned tail and plunged to new intraday lows later in the morning, then rallied back to their morning highs in the final ninety minutes of trading. The dizzying session left the main stock market indexes with mixed results. The Dow Jones Industrial Average rose 0.7% and the S&P 500 advanced 0.5%, but the Nasdaq Composite lagged behind by merely closing flat. Nevertheless, since the Nasdaq was trading 1.2% lower at its mid-day low, the afternoon recovery was rather substantial. Small and mid-cap stocks showed the most relative weakness. The Russell 2000 and S&P Midcap 400 indices lost 0.5% and 0.3% respectively. The S&P and Dow closed at their best levels of the day, as the Nasdaq finished slightly below its morning high.

Turnover eased from last Friday's rapid, news-driven pace. Total volume in the NYSE declined 28%, while volume in the Nasdaq registered 24% lighter than the previous day's level. Considering the previous day's institutional distribution, it was negative, but not surprising, that decreased volume levels accompanied yesterday's gains in the S&P and Dow. Furthermore, a closer look "under the hood" reveals a session that may have appeared bullish on the surface, but actually exhibited bearish divergence. The biggest concern is that the bounce in the S&P and Dow occurred with negative to flat breadth. Declining issues slightly beat advancing issues, and advancing volume was only on part with declining volume. This tells us yesterday's gains in the major indices were narrow-based, and the poor performance of leading stocks confirmed this as well. Leading internet stock Baidu (BIDU), for example, fell 3%, despite a flat close in the Nasdaq.

The combination of the lingering Goldman news and quarterly earnings season now getting into full swing makes for rather high odds that more whippy price action and higher volatility is headed our way in the very near-term. As such, we remain primarily in "SOH mode" (sitting on hands) until we see how broad market action plays out over the next several days. This does not mean trading opportunities are non-existent, but most of the setups we see are ideally suited for much shorter holding periods than the multi-week trading time frame of this newsletter. Case in point is the recent price action of ProShares Ultra Semiconductors (USD). Below is a daily chart that illustrates the subsequent price action after its recent breakout:



In our morning commentary of April 14, we analyzed USD as a potential breakout play for that day's session. However, we also said the setup was most ideally suited as a very short-term play, with just a 1 - 2 day hold time. That day, we also provided ideas for a simple method of managing trades with such a short hold time, but specifically noted we would NOT be "officially" entering the trade as a new position in our model ETF portfolio. On April 14, USD indeed broke out, and continued higher the following day, but then quickly reversed to give it all back over the past two days. Therefore, the trade may have been profitable for rapid-fire, very short-term traders, but would not be looking so hot right now if the trade was entered with the intention of a longer holding period.

The price action of USD over the past week is an ideal example of why we have been shying away from buying ETF breakouts at current levels in the broad market. Right now, breakouts apparently have a higher risk of failure if holding more than a day or two. As such, we're focusing our efforts on pullback buying instead. Hopefully, the market will continue to steadily retrace down to key support levels that provide low-risk buy entries in ETFs with relative strength. Even a healthy, multi-week sideways price consolidation would enable the moving averages to rise up and provide support. We'll be monitoring the price action of leading ETFs and keeping them on our radar screen in the event of further market correction. But for now, we're content to be in "SOH mode." Cash is always a valid position, and we believe it may be one of the best positions out there right now (for short to intermediate-term traders)

Open ETF positions:

Long - (none)
Short (including inversely correlated "short ETFs") - FAZ (half position)

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.