Following through on the downside resolution of last Friday's session, stocks suffered another substantial round of selling yesterday, sending several of the major indices below their February 2010 closing lows. The broad market spent the first half of the day attempting to claw its way back from the previous day's decline, but relative weakness in the financial sector weighed heavily on stocks, causing the main stock market indexes to slide lower in the afternoon. The Dow Jones Industrial Average lost 1.2%, the S&P 500 1.4%, and the Nasdaq Composite 2.0%. The small-cap Russell 2000 and S&P Midcap 400 indices tumbled 2.5% and 2.0% respectively. All the major indices closed at their dead lows of the day.

Total volume in the NYSE declined 12%, while volume in the Nasdaq was 5% lighter than the previous day's level. In both exchanges, turnover slipped below 50-day average levels. In healthy bull markets, which we're obviously not in right now, lighter volume on down days is positive. However, in bearish markets, after the major indices are already in correction mode, stocks frequently fall under their own weight, simply due to a lack of buying interest. Confirming this were extremely weak market internals, where declining volume destroyed advancing volume by whopping margins across the board.

In the June 4 issue of The Wagner Daily, we pointed out the relative strength in the S&P Retail SPDR (XRT), and said it could be in play as a short-term buy entry IF it rallied above its May 28 high of $41.16. But rather than rallying above that price, XRT plunged sharply lower in the two days since then, and is now trading at its lowest level since late February. Take a look:



The recent price action in XRT was a good lesson in two areas: the importance of waiting for a proper trigger price and the challenge in buying even strong stocks and ETFs in a weak market. We're always preaching the importance of waiting for proper technical trigger prices before buying, rather than jumping the gun. Simply having the discipline to follow this rule kept traders out of trouble, as XRT never traded up to our valid trigger price for entry. Secondly, the weakness in XRT illustrates that even the ETFs that hold up while the market sells off will eventually succumb to selling pressure in the broad market, if it is intense enough. Conversely, short sale entries were risky in the middle of last week because the Nasdaq had just registered back-to-back accumulation days on strong volume, with early signs of leadership in top stocks.

Yesterday, the S&P and Dow finished at their lowest closing prices of 2010. Now, both indexes are trading at critical support of their intraday lows from both February and May. With volatility so high on a day-to-day level, the daily charts have become rather choppy. However, the longer-term weekly charts smooth out the noise and more clearly show the importance of these two benchmark indexes holding up near their current price levels:





The dashed horizontal lines on the charts above clearly illustrate the importance of stocks not moving any lower. If they do, major levels of price support will be breached, which would likely send the major indices to another leg lower in the intermediate-term. Nevertheless, with such major support near current prices, the reward-risk of initiating new short positions at current prices is not very positive. Conversely, with last week's bounce attempt now eradicated, it's risky to blindly start buying stocks and ETFs without any indication of institutional accumulation. Although we hate to sound like a broken record, there really isn't much for intermediate-term traders to do right now. Astute short-term traders, especially daytraders, may find select opportunities in the current environment, which we occasionally point out in Intraday Trade Alerts, but sharp, surprise opening gaps in both directions have made it a treacherous market for "trend traders" who hold positions for more than a day or two.

The good news is the high volatility of the present, much like the massive swings in October of 2008, will eventually pass. At some point, the major indices will settle into a tighter trading range, build bases of support, institutions will start buying again, and new leadership will develop. When that happens, we'll definitely be ready to take advantage of the fresh opportunities. But until that happens, the name of the game right now is capital preservation, which we've fortunately been accomplishing rather well. In a raging bull market, every trader and investor can easily be a hero. However, it's times like these that separate the men from the boys (and the women from the girls). Since May 1, the S&P 500 has plummeted 11.5%, but the model ETF portfolio of this newsletter has GAINED 2.5% during the same period (including the mark-to-market value of our two open positions). Since the start of 2010, the S&P 500 has lost 5.8%, while our portfolio has gained 3.8%. In the business of trading, as well as the game of life, slow and steady win the race every time. Patient and disciplined traders will always be rewarded over the long-term.

Open ETF positions:

Long - UNG
Short (including inversely correlated "short ETFs") - GDX


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.