A choppy and indecisive session led to a third straight day of losses for the major indices, as turnover in the NYSE also picked up yesterday. Oscillating in a relatively wide range throughout the day, the S&P 500 eventually settled 0.9% lower. The Nasdaq Composite lost 1.1% and the Dow Jones Industrial Average fell 0.4%. Small and mid-cap stocks lagged behind, opposite of the relative strength they have been showing since the broad-based rally off last month's lows began. The Russell 2000 and S&P Midcap 400 shed 1.7% and 1.9% respectively. All the main stock market indexes closed near their intraday lows.

Trading activity was mixed. Total volume in the NYSE edged 2% higher than the previous day's level, but volume in the Nasdaq receded 9%. The S&P 500's loss on higher volume caused the index to register a bearish "distribution day," the first such instance of institutional selling since the S&P 500 since the current uptrend off the mid-July lows began. Nevertheless, even a moderately bullish market can handle an occasional bout of higher volume selling, especially when volume only rose modestly. The presence of two or more "distribution days" within the next week, on the other hand, would be a negative sign for the stock market's fledgling rally. We will be monitoring "under the hood" very closely in the near-term.

The largest moves in the stock market yesterday came from the commodities, as well as the companies that are correlated to them. Unfortunately for the bulls, however, those large moves were in a southerly direction. Last week, several commodity-related ETFs formed potential reversal bars on their weekly charts, but yesterday's extremely bearish action technically likely destroyed the chances for a significant bounce in the near-term. Momentum from the bearish reversal in commodities over the past month has been amazingly strong. Rather than being just a normal correction within the context of their long-term uptrends, overly negative price action in recent weeks tell us otherwise. To illustrate this, take a look at the daily chart of U.S. Natural Gas Fund (UNG):



Considering UNG was in such a strong uptrend prior to the start of its reversal early last month, it's quite surprising that the downtrend did not even pause at major support of the 200-day moving average (the thick orange line). Nearly every stock and ETF that reverses from an uptrend bounces for at least a few days on the initial test of its 200-day MA. UNG, as you can see, did not. Then, after selling momentum carried UNG well below its 200-day MA, it finally found a bit of support, then closed above the high of its near-term consolidation last Friday. Though we certainly were not trying to pick a definitive, ultimate bottom, we bought a speculative position of UNG last week, merely in anticipation of a quick bounce that would carry it back to its 200-day MA. But rather than seeing that reversion to more a more gradual downtrend, UNG got slammed again yesterday, gapping down to open at the previous day's low, then selling off to close below the low of the previous range. This obviously triggered our protective stop in the process.

With a plethora of overhead supply left in the wake of yesterday's gap down in UNG, realistic odds of a recovery in the near-term are now quite low. More notably, other commodity ETFs formed similar patterns to UNG. The Market Vectors Agribusiness (MOO), comprised of companies related to agriculture, plunged 5.5% yesterday. Like UNG, MOO also sliced through near-term support that was trying to form. The U.S. Oil Fund (USO) closed at the bottom of its recent range. Just a quick glance at the charts of half a dozen commodity ETFs tells us their intermediate-term corrections may be turning into significant, long-term tops. With them beaten down so badly, new short positions definitely do not carry a positive reward/risk ratio at current levels. However, after yesterday's action, there's no good reason to anticipate a decent bounce at this point either.

Biotechnology, the strongest industry sector since the intermediate-term rally began, has also corrected alongside of the broad market over the past several days. However, biotech ETFs such as S&P Biotech SPDR (XBI) are still holding above support of their recent breakouts. The small pullback has created a buying opportunity for those who missed the initial entry into the sector. A rally over yesterday's high in any of the biotech ETFs would present a low-risk entry point for anticipation of primary trend resumption.

Going into today's session, we don't expect a lot of action until after the afternoon Fed announcement. At 2:15 pm ET, the Federal Open Market Committee (FOMC) will announce their latest decision on interest rates. Wall Street is not expecting any change in rates, nor is any major change in policy expected. Still, volatility is typically light ahead of the Fed meetings, and a bit schizophrenic after the announcements. We're going to focus on managing existing positions, but avoid new entries until we see the market's initial reaction to the Fed.

Open ETF positions:

Long - UWM, XBI, EWH, UUP, TAN
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.