After opening near unchanged levels, the main stock market indexes grinded higher throughout the day, held onto the advance, and scored their third straight day of gains. The Nasdaq Composite gained 1.2%, the S&P 500 1.1%, and the Dow Jones Industrial Average 1.0%. The small-cap Russell 2000 and S&P Midcap 400 indices jumped 2.3% and 1.8% respectively. Each of the major indices finished at its intraday high, enabling the bulls to keep the near-term balance of power into the closing bell.

Turnover eased across the board, as institutions backed off the buy button yesterday. Total volume in the NYSE was 12% lighter than the previous day's level. Turnover in the Nasdaq receded 10%. In both exchanges, volume slipped back below 50-day average levels. Nevertheless, despite the slower pace of trade, market internals were quite positive. In both the NYSE and Nasdaq, advancing volume outpaced declining volume by a margin of approximately 7 to 1.

Yesterday, the S&P 500 Index, one of the better representations of broad market conditions, closed right at key resistance of its 200-day moving average. Slightly leading the S&P, both the Dow and Nasdaq already reclaimed their 200-day moving averages on July 23. However, since the S&P 500 consists of a more extensive, diverse mix of industry sectors and stocks than the Dow and Nasdaq, it's crucial the S&P follows in the footsteps of the other indices by moving back above its 200-day MA as well. Take a look:



Technically, the S&P already fractionally closed above its 200-day MA yesterday. However, stocks, ETFs, and indexes will commonly probe beyond obvious levels of resistance or support, running stops, before reversing to resume the dominant preceding trend. Until the S&P closes at least 2% above the 200-day MA (around 1,136), we're reluctant to declare a definitive breakout above the 200-day MA. Furthermore, before that happens, more significant resistance of the June high (1,131) lies in wait for the S&P 500 Index. As such, a sudden, sharp retracement lower after "overcutting" (probing beyond) the 200-day MA would not at all be surprising. However, on the other hand, a convincing move above the June high would cause the S&P to reverse to an intermediate-term (not only near-term) uptrend.

Regardless of whether or not the S&P 500 breaks out above its 200-day MA and June high, this is a good time to remind traders that, regardless of what happens in the near-term, the bigger picture of the broad market is still indicative of a sloppy, widening, "inverse wedge" pattern. To illustrate this, take a look at the same daily chart of the S&P 500 Index above, but with annotated trendlines to show the "inverse wedge" pattern:



Until the market proves otherwise, one must assume the upper and lower boundaries of the inverse wedge pattern will remain intact. Looking at the S&P with this perspective, one gets the feeling that it's okay to be biased to the long side of the market right now, but it would be prudent to sell long positions into strength and/or initiate new short positions on a test of the upper channel (the ascending blue line) of the "inverse wedge" pattern. Unfortunately for long-term investors, the chart above hints that current market conditions may be more conducive to using technical analysis to assist with a bit of market timing, rather than blindly buying and holding. The purpose of this newsletter is to not only profit from specific ETF trades, but to also keep traders and investors out of trouble by pointing out potential "gotchas" that might otherwise be overlooked.

Ever since SPDR Gold Trust (GLD) broke down sharply below its 50-day MA on July 1, then failed to recover back above it, we've been saying the shiny commodity ETF is headed for a substantial correction off its highs. Now, the shorter-term 20-day exponential moving average has apparently become resistance as well. With yesterday's 0.5% drop, GLD is now poised to make another leg lower, down to key long-term support of its 200-day MA. Though we're not short GLD, we remain short the Market Vectors Gold Miners (GDX), which has a similar chart pattern. The recent relative weakness of GLD is shown on the daily chart below:



In yesterday's commentary, we listed a select group of ETFs we're monitoring for potential buy entry on a pullback to their near-term support levels. But since the broad market moved higher yesterday, none of these positions retraced to levels of low-risk buy entry. Therefore, the same watchlist remains intact going into today. Normal, healthy corrections in the stock market occur when the least number of market participants expect them. But the patient, astute investor with a watchlist of ETFs and stocks with specific, clearly-defined entry prices stands the best chance of generating a portfolio return that far exceeds the main stock market indexes.

Open ETF positions:

Long - SMH, TLT, DBA, 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.