Stocks gapped down to open near their prior day's lows, reversed to probe above the previous day's highs, then drifted back down in the afternoon. The Nasdaq Composite was unchanged, as the S&P 500 and Dow Jones Industrial Average both slipped 0.3%. The small-cap Russell 2000 Index, typically more volatile in both up and down markets, managed to gain 0.8%. The S&P Midcap 400 Index edged 0.3% higher. The Nasdaq closed at the middle of its intraday range. The S&P and Dow settled near the lower third of their intraday ranges.

Total volume in the NYSE eased 21%, while volume in the Nasdaq registered 11% lighter than the previous day's level. Turnover in the NYSE also fell back below its 50-day average level. In both exchanges, declining volume fractionally exceeded advancing volume, but market internals were nearly flat. With prices mixed on decreasing volume, yesterday's price to volume relationship was indicative of nothing significant. In fact, the entire trading session was basically a non-event.

As explained in yesterday's commentary, we're not interested in entering new long positions until the broad market once again starts exhibiting signs of institutional accumulation. We would also like to see the major indices build multi-week bases of consolidation from which to eventually move higher. Nevertheless, now is a good time to start developing a watchlist of potential buy candidates when market conditions eventually improve. To do so, one should consider looking for ETFs that are presently exhibiting clear relative strength to the main stock market indexes. Since the major indices made such a sharp move lower last week, spotting relative strength is as easy as scanning for ETFs whose chart patterns have not suffered major technical damage. If an ETF is so strong that it holds up well, despite heavy selling in the broad market, it will typically be one of the first ETFs to surge higher and show leadership when the overall stock market eventually moves back up in a meaningful way.

One ETF that could show leadership in the near to intermediate-term is iShares Thailand Index (THD). Take a look:



Like the overall stock market, THD has exhibited quite a bit of volatility and whipsaw price action over the past week. However, unlike the main stock market indexes of the U.S., THD is still trading above both its 20 and 50-day moving averages, each of which is providing support. A rally above the downtrend line from the April 6 high could send THD on its way to moving another leg higher, but a breakout above the downtrend line is unlikely to gain momentum unless the main stock market indexes are at least holding steady. As such, realize THD should merely go on one's watchlist for the potential of future buy entry; it is not an ETF we are considering buying within the next several days.

Another ETF showing relative strength, and now consolidating at its 52-week high after last week's shakeout, is iShares Malaysia Index (EWM), coincidentally Thailand's neighbor to the south. The daily chart of EWM is shown below:



Recently, we said the 20 and 50-day moving averages of the major indices, which formerly acted as support, should now provide near-term resistance on a rally attempt. So far, that is exactly what's happening. Yesterday, the 20 and 50-day MAs acted perfectly as resistance for three popular ETF proxies of the broad market: S&P 500 SPDR (SPY), Dow Jones DIAMONDS (DIA), and Nasdaq 100 Tracking Stock (QQQQ). We've highlighted resistance of the 20- and 50-day moving averages on each of the charts below:







Because yesterday was the first test of the 20 and 50-day MA resistance levels since the major indices broke down, yesterday's intraday highs may be pivotal levels. If the major indices convincingly close above yesterday's highs in today's session, one might consider backing off with new entries on the short side. However, unless that happens, the near-term trend bias continues to favor the bears.

Yesterday, we entered a new short position in iShares U.S. Basic Materials Index (IYM), which we originally pointed out as a potential short setup two days ago. Though it failed to trade through the original trigger price we were looking for, near resistance of the descending 20-day EMA, we made a judgment call to enter at a slightly lower price because of the relative weakness it was exhibiting. As the main stock market indexes moved above their May 10 highs, just after mid-day, IYM barely budged. When stocks subsequently pulled back in the afternoon, IYM led the way lower. Now, we have two short positions (IWM and IYM), both of which were entered on the market's bounce into near-term resistance.

Open ETF positions:

Long - (none)
Short (including inversely correlated "short ETFs") - IWM, IYM

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.