After a moderate gap up on the open, stocks quickly reversed and sold off sharply through the morning session. By noon, most major averages were down 2% or more from the intraday high on a significant pick up in volume. Though the morning breakdown was quite convincing, stocks stabilized and staged a decent comeback in the afternoon before running into some selling in the final hour of trading. Overall, the afternoon rally was a bit of a confidence booster for the bulls, as there clearly was some buying interest on weakness. The small-cap Russell 2000 nearly finished in positive territory, down just 0.1% after bouncing off the 200-day moving average. The Dow Jones Industrial Average gave back 0.3%. The S&P 500 closed down 0.4%, with the S&P 400 and Nasdaq Composite right behind at 0.5% and 0.6% respectively. Most averages closed just below the mid-point of the day's range, but well off the lows of the day.

Turnover picked up considerably across the board. NYSE volume ran 17% over the prior days pace, while Nasdaq volume jumped 26% higher. Thursday's higher volume losses produced another distribution day for the Nasdaq and S&P 500. Market internals closed at average levels, with down volume beating up volume by 2 to 1 on the Nasdaq and 1.2 to 1 on the NYSE. Though today's action was technically a distribution day, we are not comfortable saying it was an overly bearish day, as both the bears and bulls had their time to shine.

PowerShares U.S. Dollar Bull Index (UUP) is back on our watchlist this week as it approaches support of the 200-day moving average on the daily chart below:



There is major horizontal price support from February to April (not shown on the chart above). The weekly chart shows UUP doing a Fibo retracement of just over 50%, thereby providing a positive reward-risk ratio (fibo measure from December 2009 low to June 2010 high). Furthermore, the Euro (FXE) is rallying into a major area of horizontal price resistance, so it's likely to start resuming its downtrend again soon. This setup is for the intermediate to long-term trader, as there isn't enough positive price momentum for the short-term trader to go long right now.

Earlier this week we mentioned a few emerging market ETFs that we are monitoring for potential pullback entries. After breaking out to new highs, iShares Thailand (THD) is now in pullback mode:



The pullback buy zone in THD is around the 48.00 - 49.00 area, where support from the downtrend line, the rising 20-day EMA, and the prior highs are clustered together. Look for a potential undercut of the 20-day EMA as a low risk entry point next week.

Sticking with the emerging market theme, iShares Chile (ECH) is also showing a ton of relative strength vs the S&P 500 and is also in pullback mode after a strong breakout to new highs last week. A correction to the rising 20-day EMA would be an ideal, low risk entry point.



The 200-day moving average remains a brick wall of resistance on the daily chart of the S&P 500 below:



Although the major averages climbed back above their 50-day moving averages last week, we have yet to see a second wave of strong, follow-through buying to indicate that the market is ready to stage a meaningful rally. Until the S&P 500 clears the 200-day moving average we expect more of the same wide and choppy price action.

Open ETF positions:

Long - DBA, UNG, TLT
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.