Stocks capped the week on a negative note, as the major indices opened lower, then traded in a tight, sideways range throughout all of last Friday's session. The Nasdaq Composite lost 0.2%, the S&P 500 0.7%, and the Dow Jones Industrial Average 0.9%. Relative weakness in the Dow helped our position in the UltraShort Dow 30 ProShares (DXD) move further into the money. Outperforming were the small-cap Russell 2000 and S&P Midcap 400 indices, both of which ticked 0.1% higher. The main stock market indexes closed near the middle of their narrow intraday ranges.

Turnover eased in both exchanges, enabling the S&P and Nasdaq to avert the bearish label of a "distribution day." Total volume in the NYSE was 8% lighter than the previous day's level, as trading in the Nasdaq declined 16%. Market internals were negative, but not by a wide margin. Declining volume in the NYSE exceeded advancing volume by a margin of just 2 to 1. The Nasdaq adv/dec volume ratio was only fractionally negative.

Several of the fixed-income (bond) ETFs that have been in intermediate-term downtrends since mid-March are poised to break out and resume their longer-term uptrends from their June 2007 lows. iShares TIPS Bond Fund (TIP), for example, gapped above its intermediate-term downtrend line last Friday and is now firmly above its 20-day EMA as well. Over the next several weeks, expect TIP to attempt a recovery of its prior highs. The daily chart of TIP is shown below:



The popular iShares 20+ Year T-bond Fund (TLT) may break out above its two-month downtrend line within the next several days. The same is true of the iShares short and mid-term government bond funds (SHY and IEF, respectively). Due to their low volatility, the bond ETFs may seem a bit "boring" to trade. However, don't forget substantial dividends are distributed on a monthly basis. Since prices then trade ex-dividend, it seems like they don't move very much. But when you factor in the dividend payments, the gains are much more substantial. Further, we don't care whether or not an ETF is "boring." Our job is to make consistent profits in the stock market, not entertainment.

In the May 9 issue of The Wagner Daily, we discussed the "bear flag" patterns that were forming on the daily charts of the major indices. Specifically, we said that, "If the S&P 500 and/or Dow Jones Industrial Average fall firmly below their 20-day EMAs, expect the next major support to be found at their 50-day MAs. For the S&P, the 50-day MA is at 1,352. The Dow will meet its 50-day MA at 12,498." The Dow went on to close last Friday's session approximately 50 points below its 20-day EMA. The S&P closed right on its 20-day EMA, shown below:



Going into today's session, traders' eyes will be focused on that pivotal support of the S&P 500's 20-day EMA. The broad market could easily bounce because it is the S&P 500's first test of its 20-day EMA in nearly a month. Nevertheless, as long as the major indices fail to bounce above last week's highs, our near-term bias remains bearish. We continue to believe that stocks will correct significantly lower from their recent gains, due to resistance of the 200-day MAs and the long-term downtrend lines that have been in effect for seven months. A rally and closing prices above last week's highs would obviously invalidate our negative, but realistic, expectation.

Open ETF positions:

Long - DXD, 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.