The broad market began the day with a strong opening gap up last Friday, but confluence of the Nasdaq Composite's primary downtrend line and its 50-day moving average caused stocks to trend lower throughout the remainder of the session. Within a few minutes of the market's opening, the Nasdaq was showing a gain of 1.3%, but the index finished the day 0.4% lower. The S&P 500 and Dow Jones Industrial Average similarly reversed early gains, as each index lost less than 0.1%. Both the small-cap Russell 2000 and S&P Midcap 400 indices fell 0.4%. The opening strength caused our short position in the iShares Russell 2000 (IWM) to trade within five cents of stopping out, but it finished the day lower and could now resume its primary downtrend from here. The iShares Silver Trust (SLV) moved several points higher, causing our long position in SLV to show a marked to market gain of nearly 9 points since our August 1 entry.

Total volume in the Nasdaq increased by 1%, but volume in the NYSE was 5% below the previous day's level. The loss on higher volume technically caused the Nasdaq to register another bearish "distribution day," but the percentage increase in the Nasdaq was inconsequential. Further, turnover in both exchanges came in below their 50-day average levels. August is typically a month in which many traders and investors take a vacation, so it is common to see a decline in both volume and volatility during this time of the year.

Perhaps the biggest factor that caused the market to reverse its gains last Friday morning was the convergence of resistance on the Nasdaq Composite. Not only did the Nasdaq run into resistance of its 3-month downtrend line, but it also failed to break out above its 50-day moving average. We have circled this multiple area of resistance on the daily chart of the Nasdaq below:

Initially, it looked as if the S&P 500 was finally going to break out and close above its 1,280 resistance level, but the Nasdaq's weakness acted as an anchor on the other indices. This resulted in bearish candlestick pattern being created on the daily chart of the S&P 500. The long "wick" or "tail" on Friday's candlestick has created overhead supply from the bulls who bought the gap up in anticipation of further gains. Therefore, it will now take a lot more work for the S&P to get back above last Friday's high. We circled this bearish pattern on the chart below:

The S&P's third failed breakout attempt at the 1,280 level, combined with the Nasdaq's bearish reversal at its resistance, does not bode well for the market. However, the one positive is that the Semiconductor Index ($SOX) closed last week above its August 3 low. This means the $SOX is still above prior resistance of its downtrend line, which should now act as the new support level. Remember that the overall broad market tends to follow the $SOX, so watch that index closely in the coming week. If the $SOX blows off last Friday's weakness and quickly regains strength, it would mandate a bit of caution on the short side of the market, at least in the near-term. But until then, we must assume that the primary downtrends in the major indices remain intact. If long, stay focused on the Pharmaceutical Sector ($DRG), one of the few industries showing great relative strength. The DJ Utilities Index ($DJU) is consolidating at its high as well. On the short side, just about every other industry sector provides a positive risk/reward ratio for short selling. As always, be sure to trade what you see, not what you think!

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.