After breaking out from a three-month long base in December, iShares MSCI Emerging Markets Index Fund ($EEM) rallied about 10%, to the $45 level, before stalling out. Since then, $EEM has pulled back gently off the highs in orderly fashion, and is now attempting to set a higher "swing low" within the base. This is shown on the daily chart below:



Notice that the base of consolidation stopped just shy of the 50-day moving average (teal line), but did touch the 10-week moving average on the weekly chart (not shown), which is a big institutional support level in an uptrending stock or ETF.

If $EEM now manages to climb back above its two-day high (which converges with the 20-day exponential moving average) and holds, we could see a low-risk buy setup develop within the next few days, as there would be another "higher low" in place within the base. Alternatively, if $EEM "undercuts" its 50-day moving average, but subsequently forms a bullish reversal candle, we could potentially have a legitimate pullback entry off key support of the 50-day moving average.

As mentioned in yesterday's commentary, Monday's (February 4) light volume that accompanied the broad-based decline was key, as it allowed the major averages to escape a distribution day. As we frequently remind our members, it's important to realize we are not in the business of forecasting short-term counter-trend moves within a confirmed uptrend. That is why our market timing model primarily focuses on the health of leading individual stocks, as well as the number of distribution days in the major averages. As long as the distribution days do not start to accumulate, and market-leading stocks continue to hold up, we do not mind the stock market pulling back for few days.

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.