After rallying nearly 20% off their lows in just one week, the major indices pulled back substantially yesterday. Stocks opened lower, briefly bounced, then trended lower throughout the rest of the day. The Dow Jones Industrial Average fell 5.1%, the S&P 500 5.3%, and the Nasdaq Composite 5.5%. The small-cap Russell 2000 shed 5.7%, as the S&P Midcap 400 lost 5.1%. All the main stock market indexes closed at their lows of the day. Though the major indices erased the preceding three days of gains, two-thirds of the advance off last week's lows remains intact.

Turnover eased slightly, enabling stocks to dodge the label of a bearish "distribution day." Total volume in the NYSE declined 3% below the previous day's level, while volume in the Nasdaq receded 7%. Trading in both exchanges remained below 50-day average levels -- for the fifth consecutive day in the NYSE. Higher volume alongside of yesterday's losses might have invalidated Tuesday's bullish "accumulation day," but it's positive that volume ticked slightly lower. Nevertheless, market internals were ugly. Declining volume in the NYSE slammed advancing volume by a margin of 18 to 1. The Nasdaq adv/dec volume ratio was negative by just under 10 to 1.

Over the past week, we've been patiently waiting for the proper entry point in CurrencyShares Japanese Yen (FXY), which had pulled back to support of its 20-day exponential moving average (EMA) after breaking out to a new all-time high. Our entry came yesterday, when its opening gap above the previous day's high triggered our long entry. Below is a daily chart of FXY:



On November 4, notice that FXY actually closed below its 20-day EMA (the teal line), but formed a bullish "hammer" candlestick pattern. This led us to believe the one-day close below the 20-day EMA was a buying opportunity created from a "shakeout," rather than a bearish trend reversal. But for confirmation of such, we waited for FXY to move back above its November 4 high, as well as its 20-day EMA. As the chart above illustrates, that happened on yesterday's open. With our new long position in FXY, we're looking for an eventual re-test of the October 24 high. Our protective stop is below the November 4 low (plus some "wiggle room").

Another ETF we recently entered is iShares Corporate Bond (LQD), which rallied above the high of a tight, mulit-week band of price consolidation yesterday. This is shown on the daily chart of LQD below:



LQD has resistance of its 50-day MA just overhead, but we're not that concerned about it. A time analysis of the LQD chart shows it usually ignores its 50-day MA. This is likely due to the regular dividend distributions of LQD. Nearly every month, on the first day of the month, LQD pays a substantial dividend (typically 40 to 50 cents per share). As with any individual stock, the price of the ETF is then adjusted lower by the amount of the dividend distribution paid to investors. Therefore, even if the daily chart of LQD shows a tight, sideways range for many months, the long-term investor is still profiting from the regular dividend distributions. Obviously, there are other fixed-income ETFs to consider as well (TLT, IEF, SHY, etc.), but we liked the technical chart pattern of LQD.

In addition to LQD and FXY, we also bought both iShares Nasdaq Biotech (IBB) and Ultra Dow 30 ProShares (DDM) on pullbacks to short-term support levels yesterday. Throwing in our existing position of Double Gold Long (DGP), we now have a pretty diverse mix of five different ETF positions. IBB and DDM are bullish positions in the broad market, while LQD and FXY are basically bearish hedges that are also working out. DGP, unfortunately, has not been doing much of anything since spot gold bounced off support of its long-term monthly uptrend line.

In yesterday's newsletter, we illustrated how the major indices had broken out above intermediate-term resistance levels, but also cautioned about buying at current levels. Specifically, we said, "Because the S&P 500 has rallied nearly 20% off last week's low without a pullback, one should be cautious of buying stocks and ETFs in the short-term. . .Since the major indices are in the process of changing their intermediate-term trends, the next short-term pullback will provide us with ideal entry points in new long positions. The only caveat is that the bulls don't want to see too steep of a retracement today that causes yesterday's trend reversals to fail."

When the market sold off yesterday, it initially looked as though the main stock market indexes were going to hold support of their 20-day EMAs, but the downside momentum prevented that from happening. With the major indices back below their previous intermediate-term downtrend lines and 20-day EMAs, Tuesday's breakout above the intermediate-term downtrend lines is indeed failing. However, keeping things in perspective, the short to intermediate-term technical picture is still not that bad. Consider, for example, that the Nasdaq Composite had just rallied 18% off its low, through six straight sessions of gains. A one-day pullback of 5.5% is less than a one-third retracement of its short-term uptrend. A 5% loss in one day is indeed quite large, but not if you consider the market's new paradigm. Two months ago, an intraday gain or loss of more than 2% was considered substantial, but day-to-day moves of 5% or more among the major indices has become the new norm.

So far, technical damage to the market's short-term uptrend is limited. The main stock market indexes are still holding support of their 10-day moving averages, and have also retained a majority of their recent gains. With a few days of higher volume gains, and the lack of higher volume losses, the price to volume relationship in the overall market has also been improving. Overall, the market seems to have built in enough support to prevent the October lows from being tested anytime soon, though that doesn't mean it won't ultimately happen.

Open ETF positions:

Long - LQD, FXY, DGP, IBB, DDM
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.