After opening in slightly negative territory, the major indices moved a bit lower in the morning, chopped around in a tight range throughout the afternoon, then finished moderately lower. Both the S&P 500 and Nasdaq Composite lost 0.5%, as the Dow Jones Industrial Average fell 0.7%. The small-cap Russell 2000 and S&P Midcap 400 declined just 0.2% and 0.1% respectively. All the main stock market indexes settled in the bottom third of their intraday ranges.

Turnover eased across the board. Total volume in the NYSE was 13% lighter than the previous day's level, while trading in the Nasdaq similarly declined 8%. Like the prior day's action in the Nasdaq, it's positive that the broad market's losses occurred on lower volume. However, market internals were worse this time. Declining volume in the Nasdaq exceeded advancing volume by more than 5 to 2. The NYSE adv/dec volume ratio was negative by only 3 to 2.

A few industries showed relative strength by breaking out to new highs yesterday. Another surge in the price of crude oil caused the popular U.S. Oil Fund (USO) to zoom to a new all-time high, alongside of the actual commodity. However, because its recent correction down to the 20-day EMA was so brief, it's a bit riskier to buy USO at current levels. If looking for an industry at a new high, consider the basic materials sector instead. Specifically, check out the Market Vectors Steel (SLX).

One could argue that the weekly chart of SLX is starting to become "overbought," but the daily chart has a decent base of support that SLX just broke out from. Remember that stocks and ETFs at new 52-week highs often continue to move much higher without pulling back. This is due to the complete lack of overhead supply that would otherwise be created from traders and investors who bought at higher levels and attempt to sell into strength when the prices move back up. Still, SLX at current prices may be best left to shorter-term traders. In the event of a pullback, the two dashed horizontal lines on the chart below mark the areas where SLX should find price support:



The iShares Nasdaq Biotech Fund (IBB), which we pointed out as a bullish setup yesterday, was flat yesterday. Though it did not rally above the previous day's high, it's bullish that IBB remained unchanged while the broad market moved lower. It's also positive that IBB held support of its 20-period exponential moving average on the hourly chart interval. As it continues to show relative strength, IBB should soon trigger our long entry by breaking out above its 200-day moving average. This will most likely happen as soon as the broad market bounces, but a sharp sell-off in the broad market would invalidate the long setup.

Upon further analysis, we are no longer optimistic about the long setup in S&P Utilities SPDR Fund (XLU), which was also discussed in yesterday's commentary. Though we initially liked the May 2 breakout above its recent range and 200-day MA, XLU dropped 1.5% yesterday, surrendering practically all of its May 2 gain in the process. This leads us to believe the May 2 strength may have been a short-lived "fakeout breakout." More importantly, we noticed the longer-term weekly chart is forming the right shoulder of a bearish "head and shoulders" chart pattern. As such, the reward/risk ratio of buying XLU, even if it attempts to break out again, may not be so good.

As for the broad market, the bulls and bears may be starting another round of tug-of-war to battle for dominance throughout the remainder of May. The major indices are still trying to break out above their long-term downtrend lines that have been in place since last October, but not one has confirmed a reversal of its dominant trend. The 200-day MAs also loom overhead, possibly giving the bulls pause for concern about taking the market another leg higher.

Open ETF positions:

Long - UUP
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.