Equities faded on Friday on mixed trade. Yesterday's price action pulled all five major indices into negative territory but all five closed well off session lows. The small-cap Russell 2000 dropped 0.8%, as the S&P MidCap 400 lost 0.6%. Both the Nasdaq and the S&P 500 shed 0.5%. The Dow showed the most relative strength as it fell by only 0.4%.

Market internals ended the session mixed. Volume was marginally lower on the Nasdaq but ended 3.7% higher on the NYSE. Declining volume outshined advancing volume by a ratio of 2.9 to 1 on the NYSE and 1.6 to 1 on the Nasdaq. Despite the fact that internals painted a moderately negative picture of the market, the fact that all of the major averages recovered from session lows and formed distinct reversal candles, actually tips the scale in favor of market bulls. However, it was by no means an accumulation day on either index, given the mixed internals.

The semiconductor sector has shown relative strength recently, as it has been one of the top ten sectors we follow. However, on Friday this sector showed relative weakness as it closed near session lows. The strongest ETF in the semiconductor space has been the Market Vectors Semiconductor ETF. Nonetheless, it too on Friday sold off to close near session lows. SMH could offer a buying opportunity into a pullback at the its 200-day, 50-day and 20-day moving averages. We will be following SMH closely for a possible buy entry.



Over the past four sessions, the iShares Dow Jones Real Estate Index Trust (IYR) has undercut but held support of its 200-day MA. Yesterday, IYR saw its deepest undercut of this key mark but reversed to close near session highs. A volume-charged move above the four-day high of $57.89 could provide a long entry trigger for IYR. We are placing IYR on the watchlist. Our members can find trade details for this setup in the watchlist section of the newsletter.



Current watchlist candidates IXN and XRT both continue to set up nicely. IXN appears to be setting up better than XRT, as it has been coiling in a very tight trading range since gapping up on January 3. It has traded in a one dollar and twenty cent range for ten days now. This tightening price action is encouraging. The one flaw in the IXN setup is the bearish divergence between the accumulation-distribution line and the price action over the past several months. However, things can change quickly with respect to the Acc-Dist line.

Although Friday's market action appeared bearish, all five major indices closed near their respective intraday highs and new leadership stocks continue to emerge. We are seeing the price confirmation among small-cap leadership stocks, as they broke to new highs on Friday despite the negative price action. Further, buyers have continued to hold up the bid on virtually every pullback recently. Our bullish conviction remains intact.

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.