Stocks showed strength on Monday but volume was light. Early morning action was choppy, but by 10:30 am the major indices stabilized and rallied to close near the session highs. The Nasdaq led the advance by finishing 1% higher yesterday. The Dow Jones Industrial Average posted a healthy 0.9% gain, while both the small-cap Russell 2000 and the S&P MidCap 400 rose by 0.8% day over day. The S&P 500 rallied 0.6% on the day.

Market internals ended the day mixed. Turnover was lower on both major indices. However, the NYSE saw a dramatic decrease in volume of 25%, while trade on the Nasdaq fell by a modest 1.3%. Advancing volume was higher across the board. The ratio of advancing to declining volume ended the day at 1.8 to 1 on the NYSE and 3.0 to 1 on the Nasdaq.

Trading has been somewhat of a challenge lately. There have been many failed breakouts and a lack of follow-through with normally dependable trading setups. Although it is a contradiction in terms, it feels as if we are in a "range bound uptrend". Below are a series of charts that might help to explain the recent lack of conviction in the market. From our daily research we are coming across hundreds of ETFs and stocks that are exhibiting divergence between price action, and the Accumulation/Distribution (Acc/Dist) technical indicator. As we have discussed in recent newsletters, a protracted divergence between price and Acc/Dist is often a leading indicator for trend reversal (or consolidation). The charts below are self explanatory.









The S&P Select Healthcare SPDR ETF (XLV) has maintained support and has consolidated during the recent market correction. This exhibition of relative strength suggests that a move above the January 12 high of $32.36 could provide a buying opportunity in XLV. Since most breakouts have failed recently, a strong increase in volume will likely be needed to carry XLV higher.




The iShares Cohen & Steers Realty Majors ETF (ICF) has attempted to rally above $67.00 three times in the past five days. A volume-fueled advance above this key mark could present a buy trigger for this ETF entry.



As demonstrated by abundant examples of divergence between price action and Accumulation/Distribution, the market appears to be at an important crossroad. Quality setups are far and few between and we are inclined to be cautious in the current environment.

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.