The higher volume stalling action in the S&P 500 and NASDAQ points to some churning in the market, which is a more subtle sign of distribution (stocks are being sold into strength by institutions). Along with the recent pick up in "distribution days," the market is running into the meat of earnings season this week and next, so we can expect a pick up volatility along the way.

Moving averages play a very big role in our daily analysis, and we rely heavily on certain averages to locate low risk entry and exit points. For gauging momentum in the short-term, the 5 and 10-day moving averages work very well. For example, if a stock or ETF is above the 5-day MA, there is almost no good reason to sell, unless the price has made a 25-30% advance in a few days. The 10-day MA is also a very good moving average to help ride the trend with a bit more wiggle room. For trend traders, no stocks or ETFs should really be sold while they are above the 10-day MA after a strong breakout. For example, look at the difference between $USO and $FDN at the highs. $FDN held above the rising 10-day MA minus a little shakeout, which is a sign that the momentum from the breakout is still strong.



However, $USO failed to hold the 10-day MA, which is a sign that the momentum from the breakout is fading, so we sold 25% of our position on 7/25, knowing that a break of the 10-day MA could possilby lead to a deeper correction.



While the 5 & 10-day moving averages are by no means a perfect system for exiting a position, when used properly, they allow us to stay with a trend and trade what we see, not what we think.

As for our open ETF position, $TAN, $FDN, and $IHI have all been holding up well. $SMH is trying to recover from a false breakout to new highs and needs to hold at or around the 50-day MA. $USO needs to recover back above the 20-day EMA within the next day or two, or the odds will favor that the price action will remain range-bound for a few 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.