The major indices kicked off the week with an opening gap yesterday morning, but stocks subsequently drifted in a lethargic, sideways range throughout the session. Tech stocks showed slight relative strength for a change, enabling the Nasdaq Composite to gain 0.3%, but the S&P 500 lost 0.2%. The Dow Jones Industrial Average edged 0.1% lower, as did the small-cap Russell 2000 Index. The S&P Midcap 400 fell 0.3%. Like the previous day, the broad market showed a lack of direction into the close.

As we often see on narrow-range consolidation days, turnover declined across the board. Total volume in the NYSE was 26% lower, while volume in the Nasdaq was 23% lighter than the previous day's level. Market internals were mixed. In the NYSE, declining volume exceeded advancing volume by a ratio of approximately 3 to 2. The Nasdaq's ratio was positive by nearly the same margin.

Recently, we mentioned that several of the international ETFs had begun correcting, which we felt would be a drag on the U.S. markets as well. EWZ, the ETF that tracks the Brazilian markets, was one such ETF that we felt had entered a corrective phase. When we last discussed EWZ two weeks ago, it had corrected down to support of its 50-day moving average. Since then, it has bounced off the 50-MA, but has begun rolling over again and is now back below its 20-day MA. The resulting pattern has formed a bearish "head and shoulders" pattern, the right shoulder of which is now being formed. We have labeled the components of this pattern on the daily chart of EWZ below:

Because of the "head and shoulders" pattern EWZ is showing, we like the idea of shorting it near its current level. If you want to play it conservatively, the stop could be over the high of the right shoulder, around the 42.50 area. However, an absolute stop should be set just above the high of the head, around the 43.30 area. As for a downside target, we expect EWZ to at least retest support of its neckline at the 38.50 area. However, if the neckline is broken, we could expect a downward move equal to the distance from the top of the head down to the neckline. In this case, that equates to a move of nearly 5 points. That would make an ultimate downside target of around 33.50 on EWZ. Obviously, patience may be required for this setup, but it's not a problem as long as you have your stop is in place. Other international ETFs like FXI (iShares Xinhua China 25 Fund) are showing similar "head and shoulders" chart patterns as well.

As for the broad market, yesterday's action did little to change the short-term technical picture. The same support and resistance levels we discussed in yesterday's Wagner Daily remain valid today. Due to divergence within the major indices and a myriad of mixed signals in the broad market, we remain neutral on the short-term overall market direction. At times like these, remember to keep the number of open positions to a minimum and/or reduce size on all new trade entries. When the indices begin to trade in sync with each other, that will be the time to resume normal trading operations.

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.