The short-term, bullish reversal attempt that started just three days ago promptly fizzled out yesterday, sending the main stock market indexes careening lower. Stocks opened lower, held in a sideways range throughout the Presidential Inauguration, then continued their descent in the afternoon. The Dow Jones Industrial Average tumbled 4.0%, the S&P 500 5.3%, and the Nasdaq Composite 5.8%. The small-cap Russell 2000 and S&P Midcap 400 shed 7.0% and 6.0% respectively. Each of the major indices finished at its dead low of the day.

Total volume in the NYSE increased 5% above the previous day's level, causing the S&P 500 to register a bearish "distribution day" that was indicative of institutional selling. Turnover in the Nasdaq, however, eased 11%. Market internals were simply atrocious! In both the NYSE and Nasdaq, declining volume destroyed advancing volume by a margin of approximately 28 to 1. This means there was nowhere to hide, as all but one major industry sector sustained heavy losses. The Gold and Silver Index ($XAU) bucked the trend by losing just 0.3%. This enabled our position in Market Vectors Gold Miners (GDX) to hold up nicely, while Gold Double Long (DGP), which follows the spot gold commodity price at a ratio of 2 to 1, moved substantially higher.

While on the subject of gold, let's take an updated look at SPDR Gold Trust (GLD), a popular ETF proxy for the spot gold commodity. Below is the long-term weekly chart of GLD:



The blue descending line on the weekly chart above marks the dominant downtrend GLD has been in since its July 2008 high. Last month, we pointed out that GLD was forming a bullish, multi-week consolidation pattern, right at resistance of that downtrend line. Though it had a good chance of breaking out at that time, GLD pulled back to its 50-day moving average (MA)instead. This is shown on the shorter-term daily chart below:



As the charts above illustrate, GLD perfectly bounced off support of its 50-day MA on January 15, and has since rallied back to test resistance of its weekly downtrend line. This time around, GLD has an even greater chance of successfully breaking out above its downtrend line because of its recent "shakeout" down to the 50-day MA that successfully held up. Since we already bought the leveraged gold ETF (DGP) on January 15, when it reversed off support of its 50-day MA, we now have a substantial profit buffer in the trade. As such, we should still be able to close DGP with a profit if gold fails to break out above the weekly downtrend line again. On the other hand, we can also add to our winning position if a convincing breakout occurs.

In yesterday's Wagner Daily, we discussed the slight relative strength the Nasdaq was exhibiting to the broad market. We suggested that if the index was able to reclaim its 50-day MA, it could pull the rest of the stock market along with it. "If" being the operative word in that suggestion, the 50-day MA acted as rock solid resistance instead, setting the stage for yesterday's vicious sell-off that followed.

Yesterday, we also said, "if any of the major indices close below their January 15 lows sometime this week, the slight relative strength of the Nasdaq will likely be invalidated. Further, a test of the November 2008 lows could follow shortly thereafter." Since yesterday's plunge caused all the main stock market indexes to slice through their January 15 lows, a visit back to the November 2008 lows may now be in the short-term horizon. Nevertheless, a significant new leg down in the current bear market would not occur unless the November 2008 lows are actually violated; the stock market merely remains in a wide, sideways channel, as it has been for the past two months. Further, with broad market losses in seven of the last nine sessions, we're not particularly thrilled about the risk/reward ratio of new short positions at current levels.

With just a few losing trades in our model ETF account so far this month, and several large winners as well, we've managed to efficiently preserve capital while the Dow has already fallen nearly 10% in the new year. If our sole open positions in the gold sector hold up, January could be a nicely profitable month. As such, we're in no hurry to catch every little gyration and jiggle in the stock market. In both the short and intermediate-term, we basically have a neutral view, as there are technical factors that could cause stocks to swing in either direction. We plan to wait for the next definitive move up or down before getting more aggressive with a plethora of new positions. In the meantime, cash is king and capital preservation rules!

Open ETF positions:

Long - DGP, GDX
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.