Maintaining its recent pattern of erratic and whippy trading, the stock market surrendered a substantial portion of the previous day's gains. After gapping down on the open, the major indices built on their losses throughout the morning, briefly attempted to rally in the early afternoon, then drifted back down in the final ninety minutes of trading. The Dow Jones Industrial Average settled with a 1.3% loss, as the S&P 500 declined 1.5%. Weighed down by a negative earnings report from Microsoft Corp., the Nasdaq Composite closed 2.8% lower. The small-cap Russell 2000 and S&P Midcap 400 indices shed 3.1% and 2.3% respectively. Confirming the lack of intraday direction, each of the main stock market indexes finished near the middle of its intraday range.

Total volume in the NYSE declined 10% below the previous day's level, enabling the S&P 500 to avert a "distribution day." Turnover in the Nasdaq, however, rose 6%. It's negative that a session of higher volume losses immediately followed the Nasdaq's "accumulation day" of Wednesday. Nevertheless, such volatility in the Nasdaq is to be expected considering the varied reactions to this week's earnings reports from key tech companies such as Apple, Google, and Microsoft.

In the January 21 issue of The Wagner Daily, we looked at the bullish technical state of SPDR Gold Trust (GLD), which follows the price of the spot gold commodity. At the time, GLD had rallied into key resistance of its six-month downtrend line, after perfectly bouncing off support of its 50-day moving average (MA) several days before. Since then GLD, has been consolidating in a tight range, and the spot gold futures market is presently indicating an opening gap of more than 2% in today's pre-market. If GLD indeed opens more than 2% higher and holds throughout the day, GLD will have broken out above key resistance of its long-term downtrend line. If that occurs, bullish momentum could carry GLD much higher in the short to intermediate-term. To take advantage of that possibility, we remain positioned in both Gold Double Long (DGP) and Market Vectors Gold Miners (GDX). Unlike GLD, which roughly moves in lockstep with the spot gold futures market, DGP is leveraged to move at double the percentage movement of spot gold.

In addition to gold, we also like the pattern forming on silver, as illustrated with the daily chart of iShares Silver Trust (SLV) below:



Like DGP, notice that SLV kissed support of its 50-day MA last week, then promptly moved higher. During that recent pullback, we closed our SLV position, but promptly replaced it with DGP instead. Now that SLV is starting to show relative strength again, it's worthy of a buy entry. However, we may not "officially" enter SLV because we already have sufficient exposure in the precious metals sector. If buying SLV, wait for a breakout above the December and January highs, over the $11.50 level. The recent highs are marked by the red horizontal line on the chart above.

Those looking for a bearish ETF setup may want to keep an eye on the UltraShort Oil and Gas ProShares (DUG), which is inversely correlated to the price movement of its underlying sector. Last week, DUG moved above resistance of its multi-month downtrend line, and has been chopping around in a sideways range since then. If it rallies above the high of its short-term range, it will correlate to a breakout above both its 50 and 200-day moving averages as well. Such action would help to confirm the recent drift about the multi-month downtrend line. Check out the daily chart of DUG below:



If you read yesterday's commentary, you should not have been surprised by the market's sell-off that followed that day. Since the entirety of the text was an analysis of the market's indecisive action as of late, it was merely par for the course that Wednesday's strong gains were met by a substantial amount of selling on Thursday. Fortunately, we avoided losses by sticking to our plan of doing nothing -- at least until the market confirms the direction of its next movement. If you're not in ETFs with low correlations to the overall stock market direction, cash remains king.

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.