Stocks opened relatively flat yesterday, drifted lower throughout the first half of the session, then traded in a sideways range throughout the rest of the day. Building on the previous day's weakness, all the major indices declined, but the losses were more moderate than the previous day. The Nasdaq Composite Index ($COMPX) fell 0.4%, the S&P 500 Index ($SPX) 0.6%, and the Dow Jones Industrial Average ($DJIA) 1.0%. Small and mid-cap stocks showed a bit of relative strength for a change, as these small-cap Russell 2000 Index ($RUT) edged 0.1% lower and the S&P Midcap 400 Index ($MID) slipped 0.5%. Like the previous day, all the main stock market indexes closed near their intraday lows.

Turnover rose moderately across the board, causing both the NYSE and Nasdaq to register another bearish "distribution day." Total volume in the NYSE ticked 1% higher, while volume in the Nasdaq increased 9% above the previous day's level. The price to volume relationship in the market has been becoming increasingly negative in recent weeks, just as yesterday's session hinted at selling among banks, mutual funds, hedge funds, and others institutions. Nevertheless, market internals were not too bad. Between the NYSE and Nasdaq, declining volume exceeded advancing volume for the overall stock market by a margin of approximately 2 to 1.

After a an explosive 20% move off the lows, silver has formed a tight, month long base above the 20-day exponential moving average. We also like the dry up in volume during the consolidation on the daily chart of the ProShares Ultra Silver ETF ($AGQ) below. $AGQ will have also formed a higher low within the base if the recent pullback to the 20-day EMA holds. There is also a bullish trend reversal signal with the 50-day moving average recently crossing above the 200-day moving average (please reference $SLV to see the crossover). Also of note is the 200-day moving average, which is now beginning to slope higher over the past month.



We are already long the United States Natural Gas Fund ($UNG) from a low-risk entry point on October 9. For those who missed the initial entry it is possible to buy on strength if $UNG can clear the two-day high. Another possibility, which is the most conservative of all three entries, is to wait for the action to clear the swing high of October 2. Whether $UNG breaks out this week or sometime next week, the price and volume action has been bullish since it cleared the 200-day moving average in late September.



Our current portfolio holdings remain in pretty good shape. We have close to 20% short exposure with our position in $PSQ that is currently in the money from our entry early Wednesday morning. $UNG and $FCG are setting up for a potential move out. Our lone weak holding is $GXG, which we have already reduced down to a 5% position. We are in no rush to add long exposure, as the number of distribution days continue to mount in the Nasdaq Composite. Also, we note the weakness in $AAPL, which has been leading the market to the downside since stalling out in late September. It may be difficult for the Nasdaq to find traction if AAPL is unable to hold the low of the October 9 reversal candle.

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.