An encouraging morning turned into a disappointing afternoon yesterday, as the major indices surrendered earlier gains of more than 1% to close flat to slightly lower. After gapping higher on the open, stocks held in a range throughout most of the day, but selling pressure came into the market in the final two hours of trading. The Nasdaq Composite finished unchanged, while both the S&P 500 and Dow Jones Industrial Average slipped 0.2%. However, small and mid-cap stocks managed to hold on to a portion of their intraday gains. The Russell 2000 gained 0.5% and the S&P Midcap 400 advanced 0.4%. All the main stock market indexes closed near their lows of the day.

Perhaps the worst part of yesterday's session was the higher volume that accompanied the losses. Total volume in the NYSE ticked 10% higher, as turnover in the Nasdaq increased 4% above the previous day's level. Considering we've been waiting for the confirmation of higher volume gains that would indicate the return of institutional buying, the presence of higher volume losses is the exact opposite of what the bulls wanted to see. Moreover, it's been nearly a month since the Nasdaq scored an "accumulation day." Nevertheless, the potential silver lining to yesterday's losses on increased volume was that trading in both exchanges was still lighter than average overall. It's also positive that, in both the NYSE and Nasdaq, advancing volume fractionally exceeded declining volume, despite the small losses in the S&P and Dow.

One of the top-performing ETFs in yesterday's session was U.S. Natural Gas Fund (UNG), which zoomed 4.7% higher. In yesterday's commentary, we said UNG was poised to gap above the upper channel resistance of its "bull flag" pattern, which should send it above its recent highs. We also suggested such a move would provide traders with a secondary buy entry point into UNG. Fortunately, our anticipated scenario played out yesterday, as UNG gapped higher on the open, rallied sharply higher intraday, then closed at a 3-month high. The bullish trend reversal in UNG continues to shape up, and the next significant resistance level the ETF will encounter is about 8% above its current price. At the $9.20 - $9.25 area lies horizontal price resistance of the prior lows from late January, which converges with the 200-day moving average. The updated daily chart of UNG shows yesterday's "bull flag" breakout, as well as the next level of price resistance to be aware of:



As has been the case for the past few weeks, we're still patiently waiting for U.S. Oil Fund (USO) to rally into major horizontal price resistance of its prior lows, which will provide us with the short sale entry point we've been stalking. Still trading well below its 50 and 200-day moving averages, USO continues to show relative weakness to the broad market. Its 50-day MA has also recently crossed below its 200-day MA, another bearish indicator of long-term trend. While USO could probably be sold short on its present bounce, near the current price, we'd ideally like to see a nice probe above the $35 level that triggers stops of traders who sold short near the lows, while attracting the interest of the bulls. At that point, the reward/risk for short selling USO would become quite favorable, as the crowd psychology becomes short-term bullish, but the intermediate and long-term trends remain bearish. Below is an updated chart that shows the area of resistance we're monitoring for potential short sale:



Yesterday morning, iShares Xinhua China 25 Index (FXI) triggered for buy entry, as the ETF with recent relative strength moved back above its 50-day moving average. However, intraday performance thereafter was unimpressive, and FXI moved lower when the broad market sold off in the afternoon. Since this caused FXI to slide back below its breakout level, we made a judgment call to simply sell the trade for a small loss, rather than getting stuck in a failed breakout and holding FXI all the way down to its original stop loss. But if FXI brushes off yesterday's weakness and snaps back above yesterday's high, we will consider re-entering the trade.

On an intraday basis, the S&P, Dow, and Nasdaq all moved above their 20-day exponential moving averages, as discussed in yesterday's Wagner Daily, but each index failed to close above that indicator of short-term trend. Instead, the 200-day moving average, a key indicator of long-term trend, stopped the S&P and Dow in their tracks (the Nasdaq is just a tad above its 200-day MA). Check out the daily chart of Dow Jones DIAMONDS (DIA), a well-known ETF proxy for the Dow Jones Industrial Average:



Notice that, on three separate occasions within the past three weeks, the 200-day MA has acted like a brick wall, putting the brakes on any rally attempt. The S&P 500 SPDR (SPY) has nearly the same chart pattern as well. Now, the 200-day MA is becoming even more clearly established as the "line in the sand" for the Dow and S&P. Furthermore, the June 3 high of each index also converges with the respective 200-day MAs. Therefore, a rally that enables both indexes to close above their 200-day MAs and June 3 highs would reverse the short-term trends from neutral to bullish, though the intermediate-term downtrends would remain until two significant "higher highs" and "higher lows" could be established. Finally, we're still looking for the confirmation of institutional accumulation, which would definitely increase the odds of any rally "sticking."

Open ETF positions:

Long - UNG, THD
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.