Last week got off to a great start, but the excitement fizzled out as the week progressed. The session finished on a negative note, as a third straight day of losses tested the resolve of the bulls last Friday. The Dow Jones Industrial Average lost 0.7%, the S&P 500 0.8%, and the Nasdaq Composite 0.9%. The small-cap Russell 2000 fell 1.3%, as the S&P Midcap 400 closed 0.9% lower. All the main stock market indexes again closed near their worst levels of the day.

Lower turnover across the board enabled the S&P and Nasdaq to dodge the label of another "distribution day." Total volume in the NYSE declined 9%, while volume in the Nasdaq similarly eased 13%. Over the past week, trading slowed to a rather minimal pace. In both exchanges, volume limped in below average levels every day last week. Last Friday was the lightest volume day of the year in the Nasdaq, and one of the slowest in the NYSE as well. With the exception of one day of higher volume selling, volume has been drying up while stocks pull back from the highs of their near-term rally. Bulls have avoided re-entry into the market since the beginning of last week, but the bears have also kept their selling operations minimal.

In last Friday's Wagner Daily, we pointed out the bullish setup in the Market Vectors Steel (SLX). Despite a 1.0% loss in the S&P 500 last week, SLX showed great relative strength by climbing 5%. When an ETF is so strong that it moves higher while the broad market drops, it is typically the first ETF to jump to a new high when the overall market bounces. Further, it's holding support of its 20-day EMA, and is poised to break out above its five-week downtrend line. This would lead to a resumption of the primary long-term uptrend. The safest entry in SLX is a rally above last week's high of $88.69. Take a look:



Steel is a sub-sector of the larger Basic Materials sector, which has also been acting well recently. As you can see below, the S&P Materials SPDR (XLB) has a similar chart pattern to SLX. With the 20, 50, and 200-day moving averages all providing support, XLB is another ETF to monitor for a possible breakout this week:



As we enter the last day of the first quarter, our optimism about the near-term direction of the market has faded a bit. The complete lack of follow-through since the major indices broke out above their 50-day MAs on March 24 has been disappointing. But on the bright side, the S&P, Nasdaq, and Dow have only pulled back to their 50% Fibonacci retracement levels. We won't give up expectations of further upside unless the major indices drop below their 61.8% retracement levels.

A rally above last Friday's highs would put the main stock market indexes back above their 50-day moving averages. That could subsequently give the bulls a good reason to jump back in the market, leading to another round of upside momentum. Conversely, all bets are off on the long side of the market if the major indices begin losing support of their 61.8% Fibonacci retracements. Those key support levels are: S&P 500 - 1,296, Nasdaq Composite - 2,228, Dow - 12,095. Consider setting price alerts on your trading software for these pivotal support levels.

Open ETF positions:

Long - QLD, INP, IYT, EWT
Short - (none)

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and Morpheus Trading Group, a trader education firm launched in 2001 that provides daily technical analysis of the leading ETFs and stocks. For a free trial to the full version of The Wagner Daily or to learn about Wagner's other services, visit MorpheusTrading.com or send an e-mail to deron@morpheustrading.com.