Stocks sold off in the first hour of trading, then chopped around in a sideways to lower range throughout the rest of the session. The Nasdaq Composite fell 0.9%, while both the S&P 500 and Dow Jones Industrial Average lost 0.5%. The S&P Midcap 400 Index declined by 0.6% and the small-cap Russell 2000 fell 0.4%. The major indices have now given back a majority of their gains from yesterday's intraday low to high. Stocks did the same in the two subsequent sessions that followed the June 15 rally. When markets give back a majority of their gains immediately after such high percentage gains are registered, it is typically caused by institutional selling into strength. This is also typical action of a bearish market.

Counteracting yesterday's negative action is the fact that stocks fell on lighter volume. Total volume in the NYSE declined by 12%, while volume in the Nasdaq was 11% lower than the previous day's level. Overall price action in the market may remain unimpressive, but the market has been acting better "under the hood." Of the last four days, there have been three "down" days and one "up" day. However, all three "down" days occurred on lighter volume, while the singular "up" day was on higher volume. Granted, turnover was below average levels, but was still higher than it was during the previous day's losses.

The chart patterns of the major indices on their daily charts indicates we are once again at a pivotal "make it or break it" point. Both the S&P 500 and Nasdaq Composite are coming into resistance of their six-week downtrend lines that we have been closely following, and we should soon expect to see a swift move in either direction:

If either index above breaks out above its downtrend line, it will likely generate momentum resulting from both short covering and traders who are playing the bounce on the long side. However, the probability is greater that the downtrend lines will result in another wave down to at least test the June 14 lows. The probability of the latter scenario is greater simply because we have been in a downtrend since the middle of May. Stocks continue to follow the path of least resistance until an external force causes a sudden shift in sentiment, but we have not yet seen such an occurrence. Rather, we have only seen unsustainable technical bounces off the lows.

Going into today's session, we remain in "wait and see" mode regarding our bias on the intermediate-term direction of the market. As discussed above, the market should soon resolve itself by either breaking out above resistance or resuming its primary downtrend, but take it easy until either one of those situations occur. If you're already in the market instead of waiting in cash, it's a good idea to be simultaneously positioned on both sides of the market so that you are prepared for a rapid move in either direction. We currently have three open ETF positions: one short (IYT) and two long (TTH and GLD). If the S&P breaks out to the upside, we can quickly cover the short position for a minimal loss, while we can just as easily sell our long positions if the downtrend resumes. Of the two long positions, one of them follows the price of spot gold (GLD), so it is not even tied to the direction of the overall stock market.

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.