Following through on the previous afternoon's weakness, the main stock market indexes sustained another round of broad-based losses last Friday. Stocks gapped down on the open, drifted lower throughout the morning, then oscillated in a sideways range throughout the afternoon. The Dow Jones Industrial Average slid 1.5%, the S&P 500 1.9%, and the Nasdaq Composite 2.0%. The small-cap Russell 2000 and S&P Midcap 400 indices fell 2.2% and 2.4% respectively. Modest buying interest in the final minutes of trading lifted stocks off their worst levels of the day, but the major indices still closed near their lows of the week. Nevertheless, stocks still finished positive for the week. The Nasdaq bounced 3.6%, the Dow 2.3%, and the S&P 2.2%.

Total volume in the NYSE swelled 26%, while volume in the Nasdaq increased 12% above the previous day's level. When higher volume losses occur near the top of a range, it is a bearish "distribution day" that warns of institutional selling, which often precedes substantial corrections in the broad market. However, when higher volume losses occur after the broad market has already been in correction mode for a significant period of time, it is sometimes positive because it could be indicative of climatic selling. Obviously, this doesn't mean stocks will not ultimately go lower, perhaps even retesting the May 6 lows, but it does tell us that near-term selling pressure may soon dwindle. Now, the key is to look for a session of higher volume gains ("accumulation") that could indicate the return of institutional buying interest.

Last week, very few ETFs formed constructive price patterns. While many industry sectors bounced off their prior week's lows, weakness in the latter half of the week prevented most ETFs from forming solid bases of price consolidation. There are, however, a few ETFs that may trigger an entry point for us in the coming days. One is iShares Silver Trust (SLV), which just broke out above key resistance of a major, multi-year downtrend line. The breakout is shown on the weekly chart below:



Because it broke out to a new all-time high last week, the SPDR Gold Trust (GLD) has been getting more attention than its less glamorous cousin, SLV. But even though SLV has not yet jumped to a new high, silver has started showing relative strength to gold over the past week. Below, this is clearly illustrated on a "percentage change chart" that compares the relative price performance of SLV vs. GLD over the past seven days:



Another ETF we continue to monitor for potential buy entry is U.S. Natural Gas Fund (UNG). In the May 13 issue of The Wagner Daily, we illustrated that UNG may be setting up for buy entry because its recent "undercut" of the ultimate low shook out investors and was actually bullish. In the following day's commentary, we showed a few examples of other ETFs that had similar "undercut" patterns at one time, which subsequently developed into new uptrends thereafter. Going into this week, we plan to buy UNG on a rally above last week's high, which would also coincide to a breakout above the high of the seven-week base of consolidation. Below is a "percentage change chart" of UNG vs. S&P 500 over the past seven days, where relative strength in UNG is clearly apparent:



After the S&P 500 closed right at resistance of its 20 and 50-day moving averages on May 12, we said that area of convergence (around 1,173) would act as a "line in the sand" for the index. Indeed it did, as the S&P 500 promptly sold off 3.0% over the two days that followed. Take a look:



Going into this week, the S&P 500 is now in "no man's land." As anticipated, last week's 20/50-day MA convergence led to a pullback and significant retracement of the prior week's plunge. But in the immediate near-term, it's basically a coin toss as to whether the index heads back to test last week's highs, or continues down to its 200-day moving average (the orange line on the chart above). Neither scenario would surprise us, but the overall burden of proof still resides with the bulls.

Open ETF positions:

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

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.