Fighting off a significant gap down on the open, stocks pushed higher through the morning session before chopping around in a fairly tight range during the afternoon. A slight bounce in the final hour of trading allowed most averages to close in the top third of the day's range. The S&P 500 closed 0.5% lower, while the small-cap Russell 2000, S&P Midcap 400, and Dow Jones Industrial Average each gave back 0.6%. The Nasdaq Composite lost 0.8%.

The bullish, morning reversal action came on heavy volume during the first hour of trading, but total volume steadily declined through the day, as the major averages settled into a trading range. By the close, total volume in the Nasdaq was 3% lighter than the previous day's level, while volume in the NYSE receded 10%. Market internals were fairly quiet with declining volume beating advancing volume by less than 2 to 1 on both exchanges.

In yesterday's report we discussed two potential buy points in PowerShares Agriculture Fund (DBA). Rather than undercutting the 20-day EMA before reversing, DBA triggered a buy entry for us yesterday, as it gapped open above the prior day's high. DBA closed above the two-day high on a strong pickup in volume (detailed on the daily chart below). The gap up suggests the pullback will be very short-lived and quick to resume its uptrend.



Market Vectors Brazil Small-cap (BRF) followed up Wednesday's undercut of the 20-day EMA by gapping down below the prior day's low and the daily uptrend line before reversing. The additional shakeout action serves to wash out most of the weak longs. A move back above the prior day's high will offer a low-risk entry point with a stop placed beneath the 8/12 low, minus some wiggle room.



The iShares MSCI Chile Index Fund (ECH) is in pullback mode after extending about 10% from the breakout pivot near 60.00. ECH remains one of the top relative strength ETFs in the market, so we'll continue to monitor the action for a low-risk entry point. Ideally, we would like to see a one or two-bar shakeout below the rising 20-day EMA and the low of the gap up bar on August 2.



Open ETF positions:

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

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.