The broad market attempted to recover from an opening gap down last Friday morning, but the bears took control in the afternoon, causing the major indices to close firmly lower and near their intraday lows. Small-cap stocks showed the most relative weakness, a pattern that was prevalent throughout the May to June broad market selloff, as the Russell 2000 Index fell 1.6%. The 1.2% loss in the Dow Jones Industrial Average shows us that blue chips did not fare much better. The Nasdaq Composite also closed 1.2% lower, while the S&P Midcap 400 Index declined 0.9%. The S&P 500 again ran into resistance of its 50-day moving average, prompting a 0.7% loss.

Total volume in the Nasdaq increased by 9% last Friday, giving the index its second "distribution day" within the past three sessions. Recall that the Nasdaq gained on higher volume in the prior session, but we pointed out it was not really an "accumulation day" because the index gave back most of its intraday gain and finished near its low. In the NYSE, turnover was 1% lighter than the previous day's level, but pockets of institutional selling was still apparent in leading stocks. Market internals were firmly negative across the board. Declining volume exceeded advancing volume by a margin of 4 to 1 in the Nasdaq and 5 to 2 in the NYSE.

The biggest factor likely to move the markets this week is traders' reactions to the slew of quarterly earnings reports on tap. The S&P 500, for example, is stuck between resistance of its 50-day moving average overhead and support of its 200-day moving average below:

Most likely, the S&P 500 will break out of that range sometime this week, but the direction of that move will depend on market sentiment as earnings season kicks into gear. It is positive that the S&P recovered from its losses in the latter half of June, but a lot of overhead supply remains. It would only take another wave of heavy selling to send the index back down to test last month's lows. As we pointed out last Friday morning, both the Russell 2000 and S&P Midcap 400 indices have nearly the same chart patterns as the S&P 500. The Nasdaq Composite still remains below both its 50 and 200-day moving averages, as it never recovered back above them. Important earnings reports to be aware of this week include the following:

Monday (after the close) - Alcoa (AA)
Tuesday (after the close) - Genentech (DNA)
Wednesday (before the open) - Genzyme (GENZ)
Friday (before the open) - General Electric (GE)
Browse earnings.com or your favorite financial web site for a complete listing of scheduled reports. If you don't want any surprises in the form of large opening gaps, be sure to check out the scheduled earnings date for any companies whose stocks you enter in the coming weeks.

We plan to take it easy with entering new positions until we begin to see the market's reaction to key earnings reports over the next one to two weeks. We recommend tightening your protective stops on both long and short positions that are presently open. Consider reducing your share size on any new trade entries. Now that we have sold our remaining shares of the StreetTRACKS Gold Trust (GLD) into strength, we have two more open positions. We are now using very tight stops on both the DJ Real Estate Index (IYR) and the Telecom HOLDR (TTH) in order to protect our gains. Due to its relative weakness, we also entered a new short position in the the S&P Midcap SPDR (MDY) last Friday.

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.