Stocks recovered a bit of their previous day's losses yesterday, but lighter turnover and choppy price action suggested participation by the "smart money" was absent. The Nasdaq Composite bounced 0.9%, the S&P 500 0.6%, and the Dow Jones Industrial Average 0.3%. Small and mid-caps advanced the most, but also fell the hardest on Tuesday. The small-cap Russell 2000 and S&P Midacp 400 indices posted matching gains of 1.4%. The main stock market indexes closed just below the middle of their intraday trading ranges.

In both the NYSE and Nasdaq, turnover receded 12% below the previous day's levels, indicating mutual funds, hedge funds, and other institutional players remained on the sidelines throughout yesterday's bounce. Still, trading exceeded 50-day average levels across the board. Advancing volume marginally exceeded declining volume in both the NYSE and Nasdaq exchanges.

As was the case with Monday's session, yesterday's gains were dominated by weak industry sectors bouncing from their lows. Formerly leading sectors such as Biotech and Healthcare moved only marginally higher. Again, there was also a lack of leadership among top growth stocks. Despite the gains in the major indices, yesterday's session was largely a non-event within the overall context of recent market action.

Showing relative weakness among the main stock market indexes, the S&P Midcap 400 ($MID) is now testing support of its prior low from July of this year. If it breaks down to a new low, the inversely correlated UltraShort S&P Midcap ProShares (MZZ) may be a decent momentum trade. However, given recent market indecision, we view MZZ as merely a quick trade that should only be entered by those who are comfortable with the possibility of needing to close the trade just a day or two later. The horizontal line on the daily chart of MZZ below marks the breakout to a new closing high, though the intraday high of July 15 is a bit higher:



After scanning the chart patterns of more than 300 ETFs on the Morpheus ETF Roundup guide last night, we were very hard pressed to find a single ETF trade setup with a really nice chart pattern. Practically every ETF is showing major indecision, along with violent, whipsaw moves on its daily chart. The weekly charts don't look much better. Broad-based ETFs that track indexes such as the S&P, Dow, and Nasdaq may be in play if they start breaking down to new lows (or new highs if UltraShort ETFs), but we've never been big fans of selling short the obvious breaks of support. Rather, we were more interested in selling short the first bounce into resistance that followed the September 4 sell-off, but Monday's huge gap up above resistance levels ruined our anticipated entry points. So, now we're back to the waiting game, and willing to wait it out as long as necessary. Regardless of a few recent stop-outs, we are on pace for a very profitable quarter. As such, it makes no sense to force the entry of merely mediocre-looking trades that could easily cause us to give back our hard-earned profits. Capital preservation mode rules!

Open ETF positions:

Long - SMN
Short - (none, but SMN is a bearish position)

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.