The market continued its erratic ways, printing a bearish reversal candle on the heels of Wednesday's bullish reversal action. Most averages closed well off the highs of the day and in negative territory.

Although the S&P 500 and Dow Jones reversed off the highs of the day, a move above yesterday's (May 8) high could spark a breakout to new highs in both averages. However, we believe that a breakout to new highs in the S&P 500 or Dow would be short lived and more of a "bull trap," as there is simply too much weakness in the Nasdaq, the Russell 2000, and leadership stocks.

The Nasdaq Composite has struggled to clear the 20-day EMA since breaking the 50-day MA in early April. With the 10, 20, and 50-day MAs all pointing lower, a break below the April 28 low at 4,014 could put the Nasdaq under serious pressure.

Nevertheless, as with the S&P 500, a move above Thursday's high could spark a short-term bounce. But any rally to or near the 50-day MA would more than likely produce ideal short selling setups:



As mentioned above, there is the possibility for a bull trap to be playing out in the S&P 500 if it breaks out to new highs. Under the hood, we simply do not see enough evidence to support a strong rally.

Yet, as always, we offer no predictions, and today's commentary is only good until Friday at 9:30 am. For those who are new to trading, it is very important to understand that our job is not to predict price action, but to simply react to it (using our system). Right now, we feel that it is best to lay low and manage current open positions.

As for the short side, we are waiting for low risk setups to develop. Playing one or two positions is possible, but one should avoid heavy short exposure until the S&P 500 confirms that it is weak, with a big volume crack of the 50-day MA.

While there are a few patterns here and there that may have potential, there isn't much out there that is a "must own," so for now we feel it is best to enter S.O.H mode (sit on hands).

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.