The stock market sustained its first day of substantial losses in more than a week, as higher turnover confirmed the bearishness of yesterday's session. The major indices opened slightly lower, chopped around throughout the morning, then made another leg lower at mid-day. The Dow Jones Industrial Average fell 0.8%, the S&P 500 0.9%, and the Nasdaq Composite 1.3%. The small-cap Russell 2000 suffered a 2.0% decline, as the S&P Midcap 400 shed 1.4%. All the main stock market indexes closed in the bottom third of their intraday ranges.

Volume surged higher across the board, indicating the presence of institutional selling. Total volume in the NYSE increased 20% above the previous day's level, while volume in the Nasdaq swelled 19%. Yesterday was the first "distribution day" for both the S&P 500 and Nasdaq Composite since April 9. A healthy market can normally absorb at least three such days of institutional selling within a four-week period, but just two to three "distribution days" could send the bulls packing when in a primary bear market (which we still are). It's positive that the broad market scored three bullish "accumulation days" last week, but remember that volume levels remained below average each time. Be on the lookout for further losses on higher volume. Such action could give us an early heads-up, ahead of the crowd, that institutions are about to send the stock market lower.

One of the few ETFs consolidating at its all-time high and positioned for a breakout is the DB Commodity Index Tracking Fund (DBC). Comprised of a diverse mix of actual commodities futures contracts, rather than individual stocks, DBC has been benefiting from the strong global demand for various commodities. The pie chart below illustrates the composition of the index that DBC mirrors:


Source: dbfunds.db.com

Next, take a look at the daily chart of DBC:



DBC corrected from its strong uptrend in mid-March, but perfectly found support at its 50-day moving average on March 20, then again on April 1 and 2. These successful tests of 50-day MA support are circled in pink on the chart above. Just a few weeks later, DBC has fully recovered back to its prior all-time highs. The consolidation of the past week has been tight, enabling the 10- and 20-day moving averages to rise up and provide support (the dashed purple line and solid beige line, respectively). If DBC breaks out convincingly above its prior high (the red dashed horizontal line), it will be buyable. Yesterday, DBC traded eight cents above its March high, but that did not count as a breakout. We require stocks and ETFs to trade at least 10 to 15 cents above key levels of price resistance before buying. This reduces the odds of getting stuck in a false breakout.

In this Monday's issue of The Wagner Daily, we illustrated how both the S&P 500 and Nasdaq Composite had run into resistance of their prior highs from February 1. With mixed results on Tuesday and a higher volume sell-off yesterday, those levels of price resistance are proving to be formidable. Nevertheless, it's certainly too early to declare the death of the intermediate-term uptrend off the mid-March lows. Significant countertrend bounces in primary bear markets typically end only after most of the short sellers have been washed out and the general public starts to feel somewhat confident about the market again. At that time, the other shoe often drops, leading the lambs to the slaughter.

Frankly, it seems too obvious for the intermediate-term rally to end here, cleanly and precisely at resistance of the February highs in the S&P and Nasdaq. We believe a more likely scenario is for the major indices to make another leg up and test resistance of their six-month downtrend lines that we thoroughly analyzed in yesterday's commentary. A few days of closing prices above the actual downtrend lines would not even be surprising, just to suck in the bulls one last time. Obviously, we cannot rule out the possibility that last Friday's rally was indeed the absolute high of the intermediate-term rally, but we have not yet seen enough evidence to confidently begin selling short at the present time. While the market tries to figure out its next move over the next several days, cash may be the best position. We've netted solid profits over the past month, so we're satisfied with being "flat and happy" right now, preserving those realized gains.

Open ETF positions:

Long - (none)
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.