Gapping lower on the open, stocks got off to a negative start last Friday, but the bulls took advantage of early weakness, lifting the major indices back to unchanged levels within the first hour of trading. Thereafter, the broad market drifted in a sideways range throughout most of the day, but a rally in the final thirty minutes of trading enabled the main stock market indexes to build on their previous day's gains. The Nasdaq Composite rose 1.1%, as both the S&P 500 and Dow Jones Industrial Average gained 0.4%. Showing a bit of relative strength, the small-cap Russell 2000 and S&P Midcap 400 Index advanced 1.5% and 1.1% respectively. All the major indices closed at their intraday highs, as well as their best levels of the week.

Unfortunately for the bulls, the gains were accompanied by lighter volume in both exchanges. Total volume in the NYSE receded 22% below the previous day's level, while volume in the Nasdaq eased 15%. It was the second straight day of lighter volume gains, indicating institutions were still not convinced enough to jump back into the markets. Turnover across the board was also well below 50-day average levels. Nevertheless, market internals were solid. In the Nasdaq, advancing volume exceeded declining volume by a healthy margin of 5 to 1. The NYSE adv/dec volume ratio was positive by 2 to 1.

Last week, we pointed out the "bull flag" pattern that was forming on the daily chart of U.S. Natural Gas Fund (UNG). Last Friday, UNG gained slightly and closed right at resistance of the previous two days' highs. With a pre-market gain of more than 2% in the natural gas futures markets, the ETF is now poised to gap above the high of that three-day range. If it does, it would provide the secondary buy entry into UNG we recently discussed, which was a breakout above the upper channel resistance of the "bull flag." We're already long UNG, which is showing an unrealized gain, but traders who missed the first entry might consider buying above the $8.21 area in today's session (with a stop below the breakout level of $7.70):



Most industry sector and international ETFs moved higher last week, but a vast majority of them are showing a similar chart pattern. This means we have yet to see the clear emergence of significant leadership and relative strength. There are a handful of ETFs that could see a quick, tradeable pop (short-term strength) over the next week, but intermediate-term downtrends remain intact for most ETFs. Therefore, any new long entries should still be entered with a very short-term time horizon, unless higher volume gains ("accumulation") start coming into the market this week. One ETF that could provide a tradeable bounce in the near-term is iShares Xinhua China 25 Index (FXI):



In the beginning of last week, the main stock market indexes were trading all the way down at their prior lows from May. FXI, however, had only pulled back slightly from its recent consolidation, and was still trading well above its double bottom lows from May. This means FXI, along with a few other emerging markets ETFs, has started to show relative strength to the broad market. Now, if FXI rallies above last Friday's high by more than a few cents, it will move back above its 50-day moving average, which converges with resistance of its prior "swing high" from May 10 (the dotted horizontal line). This would present a tradeable bounce opportunity that could carry FXI back to its April highs if the U.S. markets continue stabilizing.

After bouncing off support of their late May "swing lows," each of the main stock market indexes rose higher for the week. However, stocks still closed within their previous week's trading ranges. Now, for the third time in a month, the S&P, Nasdaq, and Dow are again testing near-term overhead resistance of their 20-day exponential moving averages (EMAs). Below, this is illustrated on the daily chart of the S&P 500 SPDR (SPY), a popular ETF proxy for the S&P 500 Index:



Circled in pink, notice how the 20-day EMA has perfectly acted as resistance three times over the past month, causing a resumption of the intermediate-term downtrend each time. The charts of the Dow and Nasdaq are very similar. Therefore, going into today, traders will be focused closely on whether or not these major indices manage to reverse the near-term trend by rallying to close convincingly above their 20-day EMAs. With stocks holding at support of their prior "swing lows" last week, a subsequent move above the 20-day EMAs would not be surprising, and could generate some bullish momentum in the near-term. Nevertheless, the main stock market indexes would still remain in intermediate-term downtrends, as more significant overhead resistance of their 50-day moving averages (the teal line on the chart above) continues to lurk overhead. The confirmation of institutional accumulation (higher volume gains) is still lacking as well.

Open ETF positions:

Long - THD, 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.