Commentary: Following through on the prior day's weakness, stocks sold off sharply during the first hour of trading with the major averages down around 1% at the lows of the day. After a few hours of consolidation, stocks pushed higher into the Fed report and briefly broke out to new intraday highs around 2:30 before reversing. The price action after the report was volatile, but stocks were able to defend the morning lows and close in the middle of the day's range. The Dow Jones Industrial Average managed to close in positive territory, up 0.05%. The S&P Midcap 400 closed down 0.2%. The Nasdaq Composite, S&P 500, and Russell 2000 each lost 0.3%.

Total volume came in slightly higher on the NYSE at 0.6%, and slightly lower on the Nasdaq at -0.6%. Both totals were well below the 50-day moving average of volume, which has been the case for the past two weeks. Market internals did not indicate heavy selling, as down volume beat up volume by a very ordinary 1.6 to 1 margin on the Nasdaq and 1.3 to 1 on the NYSE. Overall, the action was constructive for the bulls, as the main averages were able to rally off the lows and avoid another distribution day.

Recent selling action in the Nasdaq Composite washed out many of the longs who were caught off guard with the false breakout action, especially with yesterday's undercut of the 200-day MA. Washouts can be bullish if the price action reverses higher within a few days, as those who sold on the way down must buy back in at higher prices or risk missing the next rally. We could see a few days of back and forth action around the 2,215 - 2,270 area, as the index attempts to put in its first higher swing low. However, if the Nasdaq closes beneath the 2,215 level on a pickup in volume, then we will probably see a test of the June low and possibly more downside over the next few weeks.



The short position we established in United States Oil Fund (USO) on June 16 is now in the money thanks to yesterday's gap down below support, which is detailed on the chart below:



We liked the bearish wedging pattern on light volume that had formed since USO bottomed out in late May. Yesterday's breakdown on higher volume should spark a selloff that eventually leads to a test of the prior swing low around the 31.00 - 32.00 area.

The weekly chart of USO shows a tight, bear flag pattern that stalled out after rallying into the 10-week moving average. The black line below the price action is the relative strength line, which is measured against the S&P 500. Note how this line has already broken down to new lows ahead of the price action. This clearly shows how USO has really underperformed the S&P 500 since the February 2009 bottom.



After a violent reversal off the lows in May, iPath S&P 500 Short-Term VIX (VXX) has pulled back to the 50-day moving average. The first pullback to the 50-day MA after a strong trend reversal is usually a good spot for a low-risk buy entry to climb aboard a new uptrend. We view VXX as buyable on a pullback to the 50-day MA over the next few days in the 25.00 - 26.00 range, with a stop placed beneath the low of June 21. We see the high of June 8, around 32.00 as the target.



NOTE: Only an abbreviated version of The Wagner Daily, recapping open positions with any updates, will be published on Friday, June 25 (day 1 of maximum 7 abbreviated versions allowed per calendar year).

Open ETF positions:

Long - UNG, TLT, UUP
Short (including inversely correlated "short ETFs") - USO

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.