The broad market followed through on the previous day's weakness, as most stocks closed modestly lower. The Nasdaq Composite lost 0.4%, the S&P 500 0.3%, and the Dow Jones Industrial Average 0.2%. The small-cap Russell 2000 slipped 0.2%, while the S&P Midcap 400 declined 0.3%. The major indices bounced off their lowest levels in the final ninety minutes of trading, but still finished in the bottom third of their intraday lows.

Unlike the previous session's "distribution day," turnover was lighter across the board. Total volume in the NYSE was 20% lighter than the previous day's level, as volume in the Nasdaq ticked 15% lower. But despite the declining volume levels, market internals remained negative. Declining volume in the Nasdaq exceeded advancing volume by a margin of nearly 5 to 2. The NYSE ratio was negative by just under 2 to 1.

Although recent market action has reduced our confidence on the long side of the market, the iShares Transportation (IYT) and StreetTRACKS Metals and Mining (XME) are two industry sector ETFs that are presenting low-risk buy entry points. On January 31, IYT broke out above its consolidation and closed at a six-month high. It moved even higher over the next two days, then began to enter a modest corrective phase on February 5. Since then, it has been retracing off its highs in a healthy, controlled manner. The end result is that a "bull flag" chart pattern has formed, providing a low-risk entry point on the breakout above the upper channel. The "bull flag" is illustrated on the daily chart below:



In addition to Transportation, the Metals and Mining industry is another sector that has been showing great relative strength against recent market weakness. Initially pointed out a few days ago, XME has been correcting off its high in a similar fashion as IYT. The proper long entry point in XME is over yesterday's high, as that would represent a break of the short-term downtrend line:



After three days of correction off the highs, both IYT and XME could easily take off today. HOWEVER, due to a shaky broad market, we still recommend reducing your position size on any new long entries. Not only is the Nasdaq Composite forming the right shoulder of a "head and shoulders" chart pattern, but many individual leading stocks have also begun to show signs of distribution. We merely are providing you with a heads-up of which sector ETFs are likely to show the most strength and biggest gains if the broad market comes roaring back. Conversely, it's a good idea to keep a few shorts on in case the major indices fail to quickly bounce back.

Over the next several days, be on the lookout for both the S&P 500 and Dow Jones Industrials to test support of their 50-day moving averages. Yesterday, the Nasdaq Composite already tested its 50-day MA on an intraday basis, but closed just above it. Presently, the 50-day MA for the S&P stands at 1,423, while the 50-MA for the Dow is at 12,467. Since neither index has touched its 50-day MA since their current uptrends began back in July 2006, be prepared for a lot of volatility on the first test of support. Institutional traders often initiate buy programs when an index pulls back to its 50-day moving average, but the recent distribution may result in a whippy "tug-of-war" taking place between the bulls and bears. As always, be sure your protective stops are in place and remember to only 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.