Continuing the bearish momentum that has recently started gripping the markets, stocks suffered another round of losses across the board yesterday, but a touch of intraday buying interest enabled the broad market to pare its losses. After opening sharply lower, stocks quickly reversed higher, enabling the major indices to recover to unchanged levels by mid-day. Selling pressure came back into the market later in the afternoon, but the main stock market indexes still finished above their morning lows. The Dow Jones Industrial Average lost 0.5%, the S&P 500 0.7%, and the Nasdaq Composite 0.9%. Small and mid-cap stocks showed relative weakness again; the Russell 2000 and S&P Midcap 400 indices fell 1.5% and 1.1% respectively. The major indices closed just below the middle of their intraday ranges.

Total volume in the NYSE ticked 1% lower, while volume in the Nasdaq was on par with the previous day's level. Overall, turnover has picked up substantially over the past several weeks, coming in well above 50-day average levels, as institutions lean on the sell button. With most "up" days now occurring on lighter volume, and "down" days accompanied by higher volume, it's fair to say the volume pattern of the broad market has shifted in favor of the bears. As such, traders and investors might consider avoiding new long positions until there is at least one session of higher volume gains. While such action would not necessarily mean the correction is over, it would at least represent the initial return of buying amongst mutual funds, hedge funds, and other institutions.

In yesterday's Wagner Daily, we said, "The S&P 500 found support at the 50-day MA yesterday (May 4). This is an obvious support level, so we may see some sort of one or two-bar shakeout that dips below the 50-day MA before the market bounces higher." We also said the 50-day MA of the Nasdaq "should act as a magnet today," causing its price to undercut the 50-day MA. With yesterday's losses that followed, that is exactly what happened. Both the S&P 500 and Nasdaq Composite dipped to close just below key intermediate-term support of their 50-day moving averages. If the indices manage to quickly snap back and close above their 50-day MAs in today's session, it would be a positive sign, especially if such a bounce occurs on higher volume. However, it may be more likely the major indices will first test support of their January highs before finding any significant price support. On daily charts of the S&P, Nasdaq, and Dow below, the dashed horizontal lines mark very critical levels of support that should be the next stop for stocks if the 50-day MAs fail to hold up:







If you're wondering why the January highs are so important, it's because the most basic tenet of technical analysis states a prior level of resistance becomes the new support, after the resistance is broken (and vice versa). Since the January highs were an important level of resistance that the major indices broke out above in March, those highs should equally provide support during the current market pullback. If looking for a low-risk area to jump back into the market and start buying the strongest stocks and ETFs, a pullback to the January highs would certainly provide positive reward/risk ratios for getting long again.

Our model ETF portfolio has been positioned 100% in cash every day this week, since the month of May began. If you're a new trader, you might find a fully cash position to be boring, and may even be itching for "action." However, knowing when to be more aggressive, and when to completely be out of the markets (as we presently are), is a key reason the model portfolio of this newsletter has nearly tripled the cumulative performance of the S&P 500 in its eight years since inception. The Wagner Daily is designed for traders and investors who wish to use technical analysis, combined with sound risk management techniques, to consistently outperform the broad market over the long-term. Conversely, it is not designed for gamblers looking for a constant thrill ride in the stock market. Go to Vegas if that's what you're looking for.

Rest assured, we'll get back into the market when the setups start looking good again. But right now, there has been no convincing stabilization of prices to prompt us to get long. Conversely, weak stocks and ETFs may provide new short selling entry points on a bounce, but we're not excited about shorting the market at current levels. Although the major indices have fallen sharply over the past two weeks (while we happily and patiently sat on the sidelines and preserved capital), it was only two days ago that stocks finally broke out of the whippy, sideways range near the highs. Therefore, even opportunities on the short side of the market have thus far been limited (except perhaps for daytraders and other ultra short-term traders). If the market bounces on light volume in the coming days, we'll consider getting short one of the weaker ETFs that has already rolled over (such as the numerous international ETFs highlighted in yesterday's commentary).

Open ETF positions:

Long - (none)
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.