Yesterday was a day of broad market divergence, as sector rotation back into tech stocks enabled the Nasdaq to cruise substantially higher. The major indices got off to a bumpy start in the morning, but eventually moved higher later in the afternoon. The Nasdaq Composite settled with a 1.3% gain, but the S&P 500 and Dow Jones Industrial Average gained just 0.4% and 0.3% respectively. The small-cap Russell 2000 rallied 1.0%, while the S&P Midcap 400 advanced just 0.4%. A pullback in the final hour caused the main stock market indexes to finish just in the upper third of their intraday ranges.

Total volume in the Nasdaq climbed 11% above the previous day's level, allowing the Nasdaq Composite to register a bullish "accumulation day." Turnover in the NYSE also rose, but only by 2%. Although institutional buying may have been prevalent yesterday, remember both the S&P and Nasdaq suffered a bearish "distribution day" the prior day. Despite its gain of more than 1%, the Nasdaq showed market internals that were not overly strong. Advancing volume in the exchange exceeded declining volume by a margin of just over 5 to 2. Generally, we like to see strong percentage gains backed by an adv/dec volume ratio of at least 3 to 1. A closer look "under the hood" shows yesterday's buying in the Nasdaq was concentrated to just a small arena of stocks that racked sizeable gains. The unimpressive breadth negatively countered the bullishness of yesterday's Nasdaq gain.

Yesterday, we noticed institutional funds rotating out of top performing sectors, and into some of the laggard industries. Energy and agriculture ETFs, comprised of two seemingly unstoppable sectors, pulled back sharply yesterday. As funds flowed out of those sectors, they rotated into industries such as Biotech, Software, and Semiconductors. Transportation also surged higher, causing our short position in the iShares DJ Transportation Average (IYT) to hit its stop. Although the setup looked good at the time of entry, IYT zoomed back above its 50-day moving average yesterday, giving us the cue to quickly cover our short position.


Formerly one of the top-performing international ETFs, the iShares Latin America Index (ILF) may be headed for a significant correction. Its daily chart is pictured below:



On June 10, ILF gapped down to close below support of its 50-day moving average. One week later, ILF tried to reclaim its 50-day MA, but was unable to do so. If ILF remains below its 50-day MA much longer, it will likely make another leg lower. The ideal short entry is below support of the hourly uptrend line, which is the blue ascending line on the chart above. A protective stop could be placed above convergence of the 20 and 50-day moving averages. Meanwhile, Market Vectors Russia (RSX) continues to consolidate in a tight range, above support of both its 20 and 50-day moving averages.

Our observation of the broad market's recent price action and volume patterns leads us to believe we're dealing with a very confused, non-committal market. Intraday price action has frequently been choppy and indecisive, while steadily trending days have become rare over the past two weeks. While we obviously can't change the market's current behavior, there are things to be done on your end in order to minimize risk. Until the market becomes less erratic, consider reducing both the total quantity of open positions and the average share size of your positions. Doing so will significantly reduce the risk exposure in your trading account. When the stock market begins trending smoother, you can gradually increase the number of new positions and share size on existing positions.

Open ETF positions:

Long - RSX, SLV
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.