After trading in a tight, sideways range throughout most of the session, stocks staged a modest, late-day rally, but lethargic volume prevailed once again. The Nasdaq Composite advanced 0.6%, while both the S&P 500 and Dow Jones Industrial Average gained 0.3%. The small-cap Russell 2000 rallied 0.5% and the S&P Midcap 400 closed 0.4% higher. A pullback in the final hour caused the major indices to finish off their best levels, but still in the upper third of their intraday ranges.

Although the Nasdaq scored a decent gain, the continuing pattern of declining volume failed to confirm the rally. Turnover in the exchange fell 15%, its seventh consecutive day of lighter volume, and the lowest level since December 29, a holiday period in which volume is expected to be overly light. Total volume in the NYSE edged 1% above the previous day's level, but was still lighter than average. Furthermore, volume didn't increase until stocks sold off in the final hour. Market internals were slightly positive. Advancing volume in the NYSE exceeded declining volume by a margin of 3 to 2. The Nasdaq ratio was positive by 5 to 2.

Over the past few days, we have pointed out several ETF short setups we felt provided positive risk/reward ratios and ideal entry points. Specifically, we were looking for ETFs that recently broke below support of their primary uptrend lines, then bounced into resistance of their 50-day moving averages. If the 20-day MA was converging with the 50-day MA, even better. So far, we have pointed out both the Retail HOLDR (RTH) and iShares Emerging Markets (EEM) as two setups that met the criteria. RTH triggered a proper short entry when it fell below its previous day's low on March 9, but EEM has not yet triggered. In order to sell short EEM, we now need to see a firm break below yesterday's low of $111.96. Such a move would also correspond to a break below its hourly uptrend line:



The latest ETF with the above qualities to come across our radar screen is the iShares Real Estate (IYR). This ETF mirrors the movement of the index of REITs that comprise the Dow Jones Real Estate Index ($DJUSRE). REITs have been on fire for the past several years, but exhaustive volume on the parabolic move to the recent highs means a substantial correction is probably under way. Like most industry sector ETFs, IYR recently fell below support of its intermediate-term uptrend line and is now rallying back into resistance of its 50-day MA:



Unlike EEM, which has actually touched its 50-day MA twice over the past three days, IYR is still trading below its 50-MA. However, this is actually bearish because it indicates IYR has more relative weakness. A convincing break below yesterday's low of $86.16 provides a low-risk short entry point that would likely indicate a resumption of the intermediate-term downtrend. Note that both EEM and IYR may be on your broker's "hard to borrow" list, but most brokers are able to locate shares for short selling if you call and specifically ask them to do so.

Since the March 5 bottom, the major indices have only retraced about one-third of their losses from their February highs. Though we are not dealing with a strong market, it is one that is capable of drifting sideways to higher until an impetus triggers the probable move back down to test the recent low. Traders who have sold short the bounce over the past couple days are likely to be rewarded for their patience, but a bit of short-term pain is to be expected. Short squeezes can sometimes be tough to stomach, even if being short is indeed the proper side of the market to be on right now. If your short positions hit their stops, don't be afraid to cover and take the losses. But just be ready to jump back in when your analysis is confirmed and proven to be correct. Patient and disciplined traders are always rewarded in the long-term.

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.