After getting off to a relatively flat start, stocks attempted to move higher on the open, but the bears once again took control and erased the intraday rally attempt. The major indices drifted lower after the first 90 minutes of trading, then oscillated in a sideways range throughout the rest of the day. The Dow Jones Industrial Average ($DJIA) finished unchanged, as the S&P 500 Index ($SPX) fell 0.3%. The Nasdaq Composite ($COMPX) slipped just 0.2%, but it was the sixth consecutive day of losses in the tech-heavy index. The small-cap Russell 2000 Index ($RUT) and S&P Midcap 400 Index ($MID) shed 0.8% and 0.7% respectively.

Turnover eased across the board, indicating that banks, mutual funds, hedge funds, and other institutions were not active participants in last Friday's selling pressure. Total volume in the NYSE was 11% lighter than the previous day's level, while volume in the Nasdaq receded 3%. In both exchanges, trade was lighter than 50-day average levels. In the NYSE, declining volume exceeded advancing volume by a ratio of approximately 3 to 1. However, the Nasdaq ADV/DEC volume ratio was negative by less than 3 to 2. Although the main stock market indexes closed mostly lower for the day, the market internals were not that bad.

Given that the Nasdaq 100 Index has been drifting lower for the past six days (including last Friday's flat closing price), it's becoming a bit "oversold" in the near-term. We hesitate to use the term "oversold" because it's a relative term and stocks and ETFs can frequently become much more "oversold" before eventually bouncing. Therefore, we use the term loosely. Nevertheless, odds now favor at least a short-term bounce off the lows in the coming week. As such, we have tightened our protective stop on ProShares Short QQQ ($PSQ) to just below last Friday's (October 12) intraday low. This new stop price will still enable us to capture further gains if the Nasdaq 100 fails to bounce today and continues extending its losing streak. However, we will still quickly lock in a gain on the position if the Nasdaq suddenly bounces sharply higher or a "short squeeze" sets in.

Ideally, we would actually like to see a substantial bounce in the Nasdaq 100 Index up to new resistance of its 50-day moving average (remember that a prior level of support becomes the new level of resistance after the support is broken). If the Nasdaq bounces into the 50-day moving average and stalls, we would then have a low-risk re-entry point for selling short the Nasdaq 100 Index, with a much more positive reward-risk ratio, in anticipation of the index making another leg down. The ideal bounce for the Nasdaq 100 is annotated below on the daily chart of PowerShares QQQ trust ($QQQ), a very popular ETF proxy for the Nasdaq 100 Index:



On October 9, ProShares Ultra Silver Trust ($AGQ), a leveraged commodity ETF that tracks the price of spot silver, "undercut" near-term support of its 20-day exponential moving average, but closed with a bullish reversal candle. The following day, the ETF traded in a tight, sideways range near the previous day's high. This created a low-risk pullback setup for potential buy entry above the two-day high of October 9 and 10. As such, we bought AGQ on October 11, when it hit our trigger price for buy entry by moving above the two-day high. However, price action was immediately disappointing on the day of entry, as the ETF failed to hold above the trigger price and closed at its intraday low. The following day, October 12, AGQ gapped down below its 20-day EMA, trended lower intraday, then finished below the low of the bullish reversal bar from October 9. This caused our protective stop to be hit, as we did not want to see AGQ come back down below the October 9 low after triggering for buy entry. This is shown on the daily chart of AGQ below:



While it was disappointing that AGQ did not follow-through as anticipated, it was no big deal. First of all, our ETFs have already been doing very well over the past two months. More importantly, losing trades are simply a part of the business that must be truly accepted and expected before one can ever expect to become a professional trader. There is a lot of educational value to analyzing losing trades, sometimes even more so than analyzing what we did right in winning trades (although many other stock picking services and newsletters conveniently tend to ignore their losing trades, while hyping the big winners). In this case, our protective stop in AGQ was technically in the right place, and we simply followed the plan by exiting the trade with a smaller than average loss when the stop was hit. Nevertheless, we will continue monitoring the price action of spot silver because we still like the pattern and our entry may have just been a bit too early. Now, we will look for another reversal candle to form on high volume, but would probably not enter the trade until it gets back above the high of October 11.

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.