Stocks concluded an ugly week with another session of losses last Friday, providing little relief to bulls ahead of the holiday weekend. The major indices opened lower, drifted further south throughout the morning, then traded in a tight, sideways range throughout the afternoon. The Nasdaq lost 0.8%, the Dow Jones Industrial Average 1.2%, and the S&P 500 1.3%. The small-cap Russell 2000 and S&P Midcap 400 indices posted matching declines of 1.2%. The Nasdaq Composite showed a bit of buying interest in the late afternoon, enabling the index to finish near the middle of its intraday range, but the S&P 500 and Dow Jones Industrial Average closed near their worst levels of the day. For the week, the Nasdaq Composite tumbled 3.3%, the S&P 500 skidded 3.5%, and the Dow Jones Industrial Average shed 3.9%.

Not surprisingly, turnover receded ahead of the holiday weekend. Total volume in the NYSE declined 6% below the previous day's level, while volume in the Nasdaq ticked 10% lower. Despite the reduced trading activity, market internals were quite bearish. Declining volume in the NYSE exceeded advancing volume by nearly 6 to 1. The Nasdaq adv/dec volume ratio was negative by approximately 3 to 1.

Because the S&P 500 was approaching key support of its 50-day moving average, we used a tight intraday trailing stop to protect our substantial gain in the UltraShort Financial ProShare (SKF) last Friday afternoon. Major support of the prior lows in the Banking Index ($BKX) was another reason for the decision. As such, we sold SKF for a gain of more than 10% (10 points) since our May 19 entry. With its bullish intraday consolidation, SKF could still move higher in the ultra short-term, but we prefer to wait for a correction by price or time, and look for a possible re-entry point with lower risk. Our two remaining open positions are StreetTRACKS Gold Trust (GLD) and UltraShort Dow 30 ProShares (DXD), which are showing unrealized gains of 3.9 points and 3.4 points respectively. Stops have been trailed higher to protect profit in both of these as well.

In the May 16 issue of The Wagner Daily, we pointed out the new-found relative strength in the Philadelphia Semiconductor Index ($SOX). Specifically, we illustrated that the $SOX had broken out above resistance of its long-term downtrend line that began back in July of 2007. Although last week's sell-off in the broad market obviously caused the $SOX to drop as well, the index showed relative strength last Friday afternoon that enabled the $SOX to close the week at support of its 20-day exponential moving average. Unlike the S&P 500 and Dow Jones Industrial Average, the intermediate-term uptrend of the $SOX is still intact because it held above its prior low from early May. The daily chart of the $SOX is shown below:



Within the $SOX index, the Semiconductor HOLDR (SMH) formed a bullish "hammer" candlestick last Friday, just a few cents below major support of its 200-day moving average. As such, we expect strength in SMH throughout at least the next several days. We plan to buy SMH with a trigger price for entry above last Friday's high. However, since the overall sentiment of the market turned decidedly bearish last week, we don't plan to hold SMH very long. We would merely anticipate a test of this month's high, with a projected hold time of just 2 to 5 days. Regular subscribers should note our detailed trigger, stop, and target prices under "Today's Watchlist." As you can see below, the daily chart of SMH is similar to that of the $SOX:



The S&P 500 and Dow Jones Industrial Average have fallen well below support of their prior uptrend lines from the March lows, but the uptrend in the Nasdaq Composite is still intact. In fact, Friday afternoon's strength in the $SOX coincided with the Nasdaq running into support of its intermediate-term uptrend line. On the daily chart of the Nasdaq Composite below, notice how the index reversed higher upon falling to its uptrend line:



Going into the start of this holiday-shortened week, the main stock market indexes are showing strong divergence. The Nasdaq, as shown above, is holding support of its intermediate-term uptrend and will likely attempt to bounce. Unfortunately, the bulls may find that relative weakness in the S&P and Dow prevents the Nasdaq from rallying for long. We also know from past experience that the stock market tends to become whippy and indecisive when the major indices are out of sync with one another. In this case, broad market indecision would occur from the bulls trying to drive the Nasdaq higher, while the bears sell into strength of any bounce in the S&P and Dow. To manage this situation and maintain low risk in your portfolio this week, consider being positioned on both sides of the market, long the sectors with relative strength (such as semiconductors) and short the sectors with relative weakness (such as financials). If hedging your portfolio seems too difficult, there's absolutely nothing wrong with simply waiting on the sidelines for the main stock market indexes to get in sync with one another. Cash is always a valid position, and astute traders know there are plenty of perfect times to use it!

Open ETF positions:

Long - GLD, DXD
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.