Despite posting early session gains, stocks reversed to close near intraday lows. By the closing bell, only the Dow Jones Industrial Average closed in higher territory. The blue chip index ended the day up 0.4%. The S&P 500 closed fractionally lower, while both the Nasdaq and the S&P MidCap 400 shed 0.5%. The small-cap Russell 2000 put in the day's worst performance, as it slid 0.6%.

Internals ended the session mixed. Volume fell on the Nasdaq by 7.0% and on the NYSE by 2.6%. Declining volume topped advancing volume on the NYSE by a factor of 1.3 to 1 and on the Nasdaq by a factor of 2.4 to 1. Although the day ended on a bearish note, total volume was not strong enough to place the market under institutional distribution.

Over the past four days, we have been tracking the inversely correlated ProShares UltraShort Oil and Gas ETF ($DUG) for a possible long entry on pullback into the 20-day and 200-day moving averages. Yesterday, DUG formed the reversal candle we were looking for, as a possible pivot for a buy entry. As a result, we have now placed DUG on our watchlist for potential swing trade entry. Specific entry and exit price details for this "short ETF" swing trade setup are available to subscribers of The Wagner Daily in the watchlist section of the newsletter. Note that if DUG triggers our buy entry price, it will be entered as a very short-term trade (2 to 5 days) because inverse and leveraged ETFs underperform their underlying indexes as the holding time increases. The daily chart below illustrates the "undercut" with reversal bar we were anticipating:



Yesterday, on a spike in volume, the Direxion Financial Bear 3x ETF ($FAZ) formed a bullish reversal candle. After undercutting support of its 20-day EMA, FAZ rallied sharply and closed at session highs. FAZ now offers a potential long entry just above yesterday's high of $26.99. We are also placing this inversely correlated "short ETF" on today's watchlist:



Several days ago, we exited and took profits on our remaining short positions because the main stock market indexes had finally undercut their 200-day moving averages and formed reversal candles (as we anticipated and discussed in our June 4 ETF trading commmentary). With the undercut and reversal candles in place, the odds favored that we would see a bounce in the broad market. Consequently, we suggested patience by sitting in a cash position as the broad markt bounced and to wait for new ETF and stock trade setups to develop. Yesterday, all of the major indices put in reversal candles and there are now a plethora of potential short entry setups in the market. As we've often discussed in the past, it's important to wait for proper technical trading setups to develop; otherwise there is a high likelihood of overtrading and churning one's trading account. This is where the short-term element of our market timing system keeps us out of trouble by being on the right side of the market, or at times being fully in cash.

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.