After a choppy, indecisive day of trading, the major indices eventually settled near the flat line, as the stock market again hesitated to "show its hand." The Nasdaq edged 0.2% higher and the Dow Jones Industrial Average eked out a gain of 0.1%. The S&P 500 slipped 0.1%. Small and mid-cap stocks showed a bit of relative strength for a second straight day. The Russell 2000 and S&P Midcap 400 indices rose 0.7% and 0.4% respectively. The broad-based indices finished near the middle to upper third of their intraday ranges, showing a clear lack of commitment into the close.

On the surface, yesterday's closing prices hinted at a session that was roughly in parity between the bulls and bears, but the underlying volume patterns indicated otherwise. Volume in both exchanges increased above the previous day's levels, pointing to bearish "churning." Total volume in the NYSE increased 7%, while turnover in the Nasdaq swelled 24%. When prices are little changed, but volume ticks substantially higher, it is referred to as "churning." When it occurs near the highs within an uptrend, churning is bearish because it is typically the end result of stealth institutional selling into strength. The past four days have consisted of one "distribution day" (higher volume losses), two "up" days on lighter volume, then one day of churning. Clearly, the underlying price to volume patterns have indicated a shift in bias, although not readily apparent to the casual observer only looking at stock market prices, without analyzing the corresponding volume.

Because of the bearish broad market action of April 16, followed by feeble, light volume gains, the beginning of corporate earnings season, as well as the uncertainty regarding last Friday's Goldman Sachs news, we have been in "SOH mode" (sitting on hands) over the past several days. Technical indications hint of an impending pullback in the broad market, BUT we have not yet been given sufficient indication of a clear reversal of market sentiment. As such, our preferred play has been to merely observe the action from the sidelines, patiently and safely preserving capital. However, a break below the lows of the past two days in the S&P 500 could trigger a rapid shift of broad market bias. To illustrate this, take a look at two charts of the S&P 500 below. The first is a daily interval, the second is an intraday, 15-minute chart:



On the chart above, notice the S&P 500 began to stall and "churn" yesterday, as it tested resistance of it April 16 high (the day of the large sell-off). In the end, it formed a "doji star" candlestick, indicative of an intraday "tug of war" between the bulls and bears. This means the price action of today's session may be pivotal to the short-term direction of the market. Obviously, a rally and closing price convincingly above yesterday's high, on higher volume, would be bullish. It would represent a new 52-week high for the benchmark index. However, a close below the low of the past two days would likely attract the bears and lead to further selling in the near-term. If that happens, the S&P 500's would likely slide back down to test "swing low" support of its April 19 low and the 20-day exponential moving average (the beige line). With a short-term "lower high" in place, a break of that level would correspond to an accompanying "lower low," which would technically reverse the short-term uptrend. At that point, swing traders might consider a bit of near-term positioning on the short side of the market, or at least closing out most long positions if that's not already been done. Next, take a look at the very short-term 15-minute chart, which more clearly shows the importance of the two-day lows of the S&P 500:



Going into today, traders may want to set a price alert on their software that notifies them if the S&P 500 crosses below the 1,198 level, as that would indicate a breakdown below the two-day low. For the S&P 500 SPDR (SPY), the popular ETF proxy for the index, the two-day low is at $119.99. While a break below this level would likely send the S&P down to test its April 19 low, a critical level of short-term support, realize it is the closing price we're concerned about. An intraday dip below the two-day low that subsequently closes above 1,198 level would actually be bullish, not bearish, as it would be an "undercut" the shakes out the bulls.

In yesterday's commentary, we pointed out the bullish consolidation of iShares Nasdaq Biotech Index (IBB), and suggested it was a potential buy entry IF it broke out above the upper channel resistance of its consolidation. However, due to unimpressive earnings reports from a few large biotech companies before yesterday's open, IBB sold off instead, falling 1.6% instead. But the beauty of technical analysis is that waiting for proper trigger points prevented us from buying it in the first place. Since it never rallied above the trigger level for buy entry, we didn't buy it, so it didn't matter to us when it sold off yesterday. This setup was a good reminder to new traders of the importance of patiently waiting for proper entry points, rather than "jumping the gun" in excited anticipation.

Presently, we are holding just one position in our model ETF portfolio, a half-sized position of the Financial Bear 3x Shares (FAZ). We took a small, speculative position of FAZ when Goldman plunged last Friday, and that has been our only position since then. If the S&P 500 slices through its two-day low today, it would probably cause the inversely-correlated FAZ to rally above its two-day high. If it does, we may add the remaining half position to our portfolio, but we would still have only one position, a bearish one. Thereafter, our plan would be to closely analyze the price action of the major indices as they test their "swing lows." A break of those lows could prompt us to add a little more short exposure, but it's still too early to place any big, or even moderate, bets on a bearish reversal. Given the incredible resilience the market has been demonstrating lately, we would not be overly surprised if stocks once again broke out to new highs. If they do, our FAZ position would simply hit its stop for a small loss and we would re-assess the situation. Since we "trade what we see, not what we think," we have no problem with quickly jumping back into the long side of the market if that's what the charts tell us to do...but right now, they're not.

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.