Tuesday brought the fourth consecutive day of directionless trading. Since last Thursday, the major indices have "chopped" in a tight trading range. The market is obviously in consolidation mode. Stocks were mixed on the day. The Consumer Discretionary and Technology Sectors posted small gains of 0.4% and 0.3% respectively. Consumer Staples and Materials were the laggards on Monday, as both sectors shed 0.6%. The Nasdaq was the only major index to show a measurable gain, as it closed up by a meager 0.3%. The Dow Jones Industrial Average and the S&P 500 both closed at par, while the S&P MidCap 400 and the small-cap Russell 2000 both dropped 0.1% for the session. All in all, the day was uneventful.

Tuesday's volume changed little, day over day. Nasdaq turnover increased by 10% while the NYSE's volume was off by 3%. The advancing to declining volume ratio on both indices was at virtual parity. On the NYSE, declining volume edged out advancing volume by a meager 1.1 to 1. The Nasdaq saw up volume outpace down volume by 1.2 to 1. For the session, market internals provided no indication of institutional involvement.

The technical patterns for many ETFs suggest another move higher in the market. Many of the long setups look identical. They might be characterized as "vanilla". We are always cautious in placing trades when the market provides technical patterns that "everyone is talking about". At times like this it is often a good practice to search for trades that have a low correlation to the market. Our current position in TBT provides a good example. Bond, commodity and international ETFs generally show a low market correlation and we are monitoring them closely.

One technical pattern that has been showing up frequently in the past three weeks is the "head-and-shoulders" pattern. Since three weeks is a relatively short time period, the 60-minute timeframe comes in handy. Below are several ETFs that have formed head-and-shoulders patterns over the past several weeks.










The iShares Russell Microcap Index Fund (IWC) has been consolidating nicely for the past 10 trading days and has formed a bullish flag-like pattern. Further, it has filled the gap formed on October 13. IWC also realized a dramatic increase in volume on Tuesday. A rally above the two-day high of $45.00 on solid volume provides a potential entry point for IWC. We will provide trade details should we decide the proper conditions exist to enter this trade.




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.