Gapping higher on yesterday's open, the major indices initially attempted to build on recent bullish momentum, but the early strength quickly faded. Stocks drifted lower throughout the morning session, oscillated in a sideways range for the rest of the day, then finished with mixed results. The Dow Jones Industrial Average eked out a gain of 0.1%, while the S&P 500 was lower by the same percentage. The Nasdaq Composite took a rest, easing 0.4%. The small-cap Russell 2000 and S&P Midcap 400 indices lost 0.5% and 0.7% respectively. The main stock market indexes settled between the middle and bottom third of their relatively tight intraday ranges.

Total volume in the NYSE rose 11% above the previous day's level, but turnover in the Nasdaq receded 5%. Since both the S&P and Dow closed within 0.1% of the flat line, it was technically not a "distribution day." However, higher volume with nearly unchanged prices, when it occurs near the top of a range, is known as "churning," a bearish situation caused by stealth institutional selling into strength. Therefore, although the Nasdaq pulled back on lighter volume (which is positive), the S&P and Dow sustained a bit of selling pressure amongst mutual funds, hedge funds, and other institutions. A single round of churning, or even distribution, is not damaging enough to kill a rally, but it's still noteworthy for the bulls.

In yesterday's commentary, we said SPDR Gold Trust (GLD) "is now poised to make another leg lower, down to key long-term support of its 200-day MA." As anticipated, GLD showed relative weakness by moving sharply lower in yesterday's trading session, sliding 1.7% in a relatively flat day for the stock market. Now, GLD is just 1.3% above its 200-day moving average. Since this level of long-term support could easily spark a rally, traders short any of the gold ETFs, and unwilling to hold through a potentially substantial bounce, may consider taking profits as GLD comes into its 200-day MA. Though gold could correct even more sharply in the intermediate to long-term, a bounce off the first test of the 200-day MA will likely occur first.

Much weaker than GLD yesterday was Market Vectors Gold Miners (GDX), an ETF comprised of a basket of individual gold mining stocks. Tumbling 3.7% yesterday, GDX convincingly sliced through support of its 200-day MA, and also fell to its lowest closing price of the past two months. Its daily chart is shown below:



Now that GDX is breaking down below support of its 200-day MA and prior "swing low" from mid-July, the next level of horizontal price support is the May 2010 lows (circled in pink). An "undercut" of that support level would be an ideal place to cover our short position, which is where we originally set our downside price target on this setup. However, if GLD first comes into support of its 200-day MA, and starts to bounce substantially, we may just cover the GDX short position ahead of our initial price target, locking in a large gain. Although the trend correlation between the spot gold commodity and individual gold mining stocks varies with different market cycles, a wave of buying in GLD would probably cause GDX to move significantly higher as well. Therefore, if GDX starts bouncing before hitting our downside price target, we won't be greedy; rather, we'll cover to lock in a gain of 3 to 5 points on the short trade.

The July 26 price action in iShares 20+ year T-bond (TLT) was encouraging, as it pulled back intraday, but closed near its high of the day. This caused a bullish "hammer" candlestick to form on the daily chart. But although such a pattern often leads to higher prices the following day, TLT turned in a disappointing performance yesterday, gapping lower on the open, then drifting sideways until the closing bell. Nevertheless, TLT closed right at key support of its 50-day moving average. Furthermore, it's the first test of the 50-day MA since the current uptrend began in April. When an ETF has its first pullback to the 50-day MA after starting a new uptrend, the touch of the closely-watched intermediate-term support level usually sparks a round of buying that leads to a swift resumption of the dominant uptrend. For traders not already holding TLT, an entry near the current price level may present an attractive reward-risk ratio. As for a protective stop, it can be neatly placed below "swing low" support of the July 13 low of $98.18 (our current stop is $97.77). The orderly pullback to the 50-day MA is shown on the daily chart of TLT below:



Yesterday, we made a judgment call to sell our long position in the Semiconductor HOLDR (SMH), locking in a moderate gain of approximately 4% on the trade. When we bought the July 16 pullback in SMH, we had expectations of the ETF breaking out above horizontal price resistance on its next wave up. However, its relative strength started to fade after our entry. Rather than breaking out above its prior "swing high" from June, as we anticipated, it merely grinded higher as the broad market went up. Then, because the Nasdaq ran into horizontal price resistance yesterday, which could lead to a short-term correction, we made a judgment call to sell SMH instead. Still, because we bought SMH on a pullback, rather than a breakout, we were able to lock in a gain, despite the lack of bullish follow-through in the ETF.

Open ETF positions:

Long - DBA, TLT, 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.