Stocks followed up Tuesday's rally with a modest round of gains yesterday, but the Nasdaq Composite remained below its 50-day moving average. Both the S&P 500 Index and Dow Jones Industrial Average edged 0.1% higher, while the Nasdaq Composite rose 0.3%. The small-cap Russell 2000 Index and S&P MidCap 400 registered matching gains of 0.3%. Like the previous day, a bit of selling pressure into the close held the market's advance in check. The main stock market indexes finished just below the upper third of their intraday ranges. However, both the S&P and Nasdaq futures curiously slid to their intraday lows by the time their regular trading session concluded at 4:15 PM ET.

Total volume in both the NYSE and Nasdaq was 6% lighter than the previous day's level, indicating that institutions were not active participants in yesterday's session. As we've been saying, significantly lighter than average volume is normal during the "summer doldrums." Unfortunately, lighter volume, lethargic sessions are notorious for choppy and indecisive price action. Perhaps one of the greatest challenges facing many traders right now is avoiding the temptation to overtrade in a range-bound market. While we have been monitoring a handful of ETFs for potential entry over the past week, we are simply in no hurry to be heavily exposed to the broad market at the present time.

Agricultural commodities continue to perform well, and PowerShares Agriculture Fund (DBA) may be poised to soon make another leg higher. After surging higher in early August, DBA pullback to short-term support of its 20-day exponential moving average on August 11. It only stayed there one day, as DBA moved back up in the following session, triggering our reentry on the long side. Since then, DBA has been consolidating in a tight, sideways range, near its recent highs, for the past five days. A rally above the high of that five-day range should lead to a resumption of its intermediate-term uptrend. Traders who missed our initial entry point could consider a secondary entry on that breakout above the range. However, DBA could continue to build a base for another week or so. The daily chart of DBA is shown below:

 

In the August 17 issue of The Wagner Daily, we pointed out the relative weakness in the semiconductor sector. While the major indices had only retraced about half of their gains from the July lows to August highs, the Philadelphia Semiconductor Index ($SOX) had already fallen to its July lows, and was testing its February 2010 lows. Since then, the $SOX has bounced, but another wave of weakness in the broad market could easily cause the index to break down below a major level of horizontal price support. Each time an index, stop, or ETF falls to test the level of horizontal price support, the support weakens, thereby increasing the odds of a breakdown on the next subsequent test. In the case of the $SOX, it has already tested horizontal price support four times in recent months. Therefore, we are still monitoring the inversely correlated UltraShort Semiconductor ProShares (SSG) for potential buy entry. If the $SOX resumes its weakness, and SSG triggers our entry point, we will send an intraday trade alert with detailed entry, stop, and target prices to subscribers.

As we last saw on August 13, the S&P 500 and Dow Jones both formed "inside days" yesterday. This means yesterday's intraday highs of both indexes were below their respective highs of the previous day, while yesterday's lows were above the prior day's lows as well. In a trending market, inside days frequently lead to a resumption of the dominant trend. However, in range bound markets, like stocks have been in for the past several months, an inside day simply indicates apathy and a lack of direction. Since tomorrow is monthly options expiration day, the technical situation is not likely to change until at least next week. Furthermore, turnover is likely to remain light until after the Labor Day holiday. It's still a pretty good time to be in "SOH mode" (sitting on hands).

Open ETF positions:

Long - TLT, DBA, UUP
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.