As anticipated, the major indices resumed their newly formed intermediate-term downtrends yesterday. This time, even the Nasdaq succumbed to the selling pressure. Both the S&P 500 and Dow Jones Industrial Average fell 1.1%, as the Nasdaq Composite dropped 1.2%. The small-cap Russell 2000 and S&P Midcap 400 were lower by 1.0% and 0.8% respectively. A bounce in the final forty-five minutes of trading lifted stocks off their worst levels of the day, enabling the main stock market indexes to finish just above the bottom third of their intraday ranges.

Turnover remained light across the board. Total volume in the NYSE declined 19% below the previous day's level, while volume in the Nasdaq was 9% lighter. Even though the market dropped on lower volume, remember that the previous day's action was marked by "churning," which occurs when turnover surges higher, but intraday price action is flat. Recall also that institutions heavily sold into strength during the final fifteen minutes of last Friday's session. This likely aided yesterday's decline. After a week of lackluster market internals, declining volume exceeded advancing volume by more than 3 to 1 in both exchanges.

With financials continuing to be among the weakest industry sectors, we have been looking for an entry point to buy the inversely correlated UltraShort Financials ProShares (SKF). On May 21, we profited from a trade in SKF as it moved back above its 50-day moving average. Rather than holding SKF longer, we sold because we expected it to consolidate for a week or longer before moving higher. It performed as expected, then pulled back to touch support of its 20-day EMA on May 30. Yesterday, SKF gapped up on the open, trended higher throughout the morning, then retraced half of its gain in the afternoon. The end result is that SKF is now poised to close above the high of its recent consolidation. This is shown on the daily chart below:



It's a bit tricky finding the ideal entry point in SKF because it's quite a volatile ETF. Nevertheless, the upside profit potential is pretty substantial if SKF manages to convincingly break out from here. Note that SKF traded as high as $150 back when the stock market formed its intermediate-term bottom in March of this year. For those of you who daytrade, SKF is a great ETF because of its wide trading range from day-to-day.

In yesterday's Wagner Daily, we said of the Dow Jones Industrial Average that, "A move below the May 30 low should trigger downside momentum that leads to a retest of last week's lows within the next several days." Yesterday, the Dow fell below its May 30 low a few minutes after yesterday's open, downside momentum indeed kicked in, and the index actually dropped to tests last week's low by mid-day. The scenario happened as expected, but quite a bit quicker than we suggested. Below is a daily chart of the UltraShort Dow 30 ProShares (DXD), which is a bearish ETF designed to move in the opposite direction of the Dow Jones Industrial Average:



We bought the initial shares of DXD when it pulled back to support of its 50-day MA on May 29, then added the remaining shares of our DXD position shortly after the market opened yesterday. We are now showing a nice unrealized gain on the position. Because we expect the Dow to move down towards its March 2008 lows in the not so distant future, we plan to continue holding DXD and trailing a stop along the way to protect profit.

Going into today, all eyes will be on the benchmark S&P 500 Index, which tested support of its 50-day MA for the second time in a week yesterday. Since the S&P has already fallen back down to its 50-day MA so quickly after bouncing off it, the index is now in danger of closing below the 50-day MA in the near-term. Below is a daily chart of the S&P 500:



The Dow clearly has the weakest chart pattern of the major indices, but the S&P could catch up quickly by falling to new May lows if the S&P 500 fails to remain intact today. Further, the Nasdaq Composite dropped back below its 200-day MA yesterday, and the right shoulder of the "head and shoulders" pattern continues to develop. A break of yesterday's low in the Nasdaq will also correlate to a break of its intermediate-term uptrend line off the March lows. As the Nasdaq was the only index holding above its uptrend line, this would complete the bearish scenario to increase the odds of an eventual broad market re-test of the March 2008 lows.

Open ETF positions:

Long - 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.