The US stock market finished the third quarter of 2012 in uneventful fashion and with a bit of indecision. The major indices gapped lower on the open, found support and edged their way higher into mid-day, then drifted back down into the close. The Dow Jones Industrial Average ($DJIA) fell 0.4%, the S&P 500 Index ($SPX) 0.5%, and the Nasdaq Composite ($COMPX) 0.7%. Mid-cap stocks showed relative strength, as the S&P MidCap 400 ($MID) slipped only 0.3%, but the small-cap Russell 2000 ($RUT) lost 0.7%. Closing near their opening prices, the main stock market indexes finished near the middle of their intraday trading ranges.

Turnover ticked higher across the board, causing both the S&P and Nasdaq to register a bearish "distribution day." Total volume in the NYSE rose 10%, while volume in the Nasdaq was 4% higher than the previous day's level. In the NYSE, declining volume exceeded advancing volume by a margin of approximately 3 to 1. The ADV/DEC volume ratio in the Nasdaq was negative by less than 3 to 2. Whenever the S&P or Nasdaq decline on higher volume, it is indicative of selling among banks, mutual funds, hedge funds, and other institutional players, and is known as a "distribution day." Last Friday's session was the second such session of distribution in recent weeks. Within the course of a steady market uptrend, one or two "distribution days" over a 3-4 week period is normal and can typically be absorbed by a healthy market. Nevertheless, the instance of four or more days of institutional selling within the same period is usually enough to cause an intermediate-term uptrend to end. As such, will be on alert for any further sessions of higher volume selling in the coming week.

As we enter the last quarter of 2012, let's take an updated look at the technical daily chart pattern of the S&P 500 SPDR ($SPY), a popular ETF proxy for the benchmark S&P 500 Index:

 

As annotated on the daily chart above, notice that $SPY is presently trying to cling to near-term support of its 20-day exponential moving average (the beige line). In a strong uptrend, this moving average often acts perfectly as support for enabling an index, ETF, or stock to resume its uptrend (assuming a firm uptrend is already in place). As an example of this, notice how the 20-day exponential moving average perfectly acted as support in late August (point "A"). As such, we will be looking for signs of whether or not SPY holds near its current price and starts to head back up in the coming days.

Even if SPY breaks below last week's lows, the good news for bulls is that much more significant technical price support will be found near the rising 50-day moving average, which is now converging with new horizontal price support from the prior highs of April and May of this year (point "B"). Remember that one of the most basic tenets of technical analysis states a prior level of price resistance will become the new support level, after the resistance is broken. Therefore, if $SPY corrects further (down to the $142 area), it should find major support that will provide for very low risk buy entries on ETFs and stocks with the most relative strength to the broad market. Both the Nasdaq Composite and Dow Jones Industrial Average have similar daily chart patterns to the S&P 500, with the latter showing a bit more relative strength.

With the broad market in pullback mode and our model ETF trading portfolio already positioned in five different ETFs, we're not in a hurry to enter any new positions in the coming days. Of our five open ETF positions,three of them are presently showing an unrealized gain, with one of our positions now nearing its upside profit target ($UNG). Since these positions have a low correlation to the direction of the broad market, they have been holding up well during the broad market's current pullback. Still, there is no rush to assume additional risk exposure until the major indices prove they will find support near current price levels. Just to keep you updated, strong ETFs currently on our radar screen for possible near-term buy entry include the following tickers: $EWW, $EWH, $XRT, $ITB, and $KRE. As always, we will be sure to let subscribers know our exact entry, stop, and target prices if we add any of these ETFs to our "official" watchlist in the coming days/weeks.

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.