Equities advanced for the second straight day but on lower trade. Unlike Wednesday however, stocks held their ground to finish near session highs. For the second time in as many days the small-cap Russell 2000 led the market higher as it tacked on an impressive 1.5%. The S&P MidCap 400 added 0.9% while the Nasdaq ended the day up 0.8%. Both the Dow Jones Industrial Average and the S&P 500 underperformed as they posted gains of 0.1% and 0.4% respectively.

Market internals ended the session mixed. Volume was down across the board. Turnover on the NYSE dropped by 9.4% while it closed fractionally lower on the Nasdaq. Advancing volume outperformed declining volume by a factor of 2.8 to 1 on the NYSE and 3.1 to 1 on the Nasdaq. The drop in volume suggests a lack of institutional participation in yesterday's advance and eliminated the possibility of a followthrough day for the broad market.

The iShares Nasdaq Biotechnology ETF (IBB) has been consolidating along its 20-day EMA since breaking above the previous trading range on April 26. On May 25 this ETF significantly undercut its two day low but rebounded quickly to reenter the trading range. The undercut serves to "shake-out" the weak hands and draw shorts in to fuel a potential rally. An ideal situation would be for IBB to form an inside candle on light volume today. This price action would provide a long setup on a move back above resistance at $107.80.



On a sharp reversal move on May 11 the ProShares Ultra Basic Materials ETF (UYM) reversed sharply and closed below its 50-day moving average. This price action resulted in more selling of this ETF and a loss of support. Since then UYM has climbed its way back into resistance at the 20-day EMA. An overcut of this key mark followed by a return to the two day range could present a shorting opportunity in UYM.

 

The broad market is now approaching resistance. We will be watching closely to determine if the recent loss of support was just an undercut of the 20-day and 50-day moving averages or a short-term trend reversal. We will be watching closely for a potential pattern similar to those suggested for IBB or UUM in today's newsletter. An overcut or undercut formation will likely provide an important clue to the next move in the market.

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.