Another intraday battle between the bulls and bears led to an erratic, volatile session yesterday, as most of the broad market gave up early gains to finish lower. The Nasdaq Composite showed a gain of 0.4% at its morning high, but reversed to a 0.8% closing loss in the afternoon. The S&P 500 similarly surrendered a 0.7% intraday gain to finish 0.1% lower. Like the previous day, the Dow Jones Industrial Average managed to keep its head above water while the other major indices posted losses. The blue-chip index advanced 0.3%. In keeping with the recent pattern, small-caps lagged behind. The Russell 2000 Index fell 1.0%, though the S&P Midcap 400 declined only 0.4%. Overall, yesterday's action was much like the previous session. Stocks got off to a good start, but reversed into negative territory in the afternoon. Both days, the Nasdaq and Russell 2000 showed the most relative weakness, while the large-cap Dow was the only index to close higher. The interesting divergence between the key stock market indexes continues to persist.

The most negative factor of yesterday's session was that turnover ticked higher across the board. Total volume in the NYSE increased by 18%, while volume in the Nasdaq finished 10% above the previous day's level. The losses on higher volume caused the S&P 500 to register its second "distribution day" within the past three weeks, but it was the Nasdaq's fourth such day of institutional selling in the same period. Worse is that two of the Nasdaq's four "distribution days" have occurred within the past three days. Even the healthiest of markets rarely sustain their uptrends when five or more days of institutional selling present themselves within a four week period. Clearly, the Nasdaq is progressively looking worse than the S&P and Dow. Declining volume in the Nasdaq exceeded advancing volume by a margin of 4 to 1. The NYSE ratio was negative by less than 3 to 2.

As we have been focused on for the past several days, the Nasdaq Composite broke support of its 20-day exponential moving average yesterday. This also correlated to a confirmed break of its primary uptrend line, which is illustrated on the daily chart below:



The Nasdaq's confirmed close below the 20-day EMA is its first significant correction since the index began trending higher, off its March lows. Further, the weakness has also been confirmed by four recent days of institutional selling, two of them only appearing in the last two sessions. On any broad market rally attempt in the coming days, expect both the 20-day EMA and prior uptrend line to act as significant resistance levels. Next support for the Nasdaq should be found at the May 1 low of 2,510. Below that, the pivotal 50-day MA is currently at 2,476.

The Russell 2000 is the only other major broad-based index that is also trading below its 20-day EMA. Recent relative weakness in the small-cap arena has caused the index to look even worse than the Nasdaq. After failing to follow the other major indices to a new high earlier this month, the index immediately fell victim to selling pressure. It has spent most of the past week below its 20-day EMA, and is now within close proximity of its 50-day MA. Watch the action in this index as it tests the 50-day MA over the next several days:



Historically, growth-oriented small-cap stocks have led the stock market in both directions, but the S&P and Dow have been bucking the trend. The S&P 500 briefly popped to a new high on an intraday basis yesterday, but the index finished lower, forming an "inverted hammer" candlestick in the process. As you can see on the chart below, the S&P 500 closed 11 points above its 20-day EMA. We anticipate a test of that support level within the next few days, but it has a much better chance of holding than the Nasdaq did:



As for the amazing Dow, it actually finished yesterday at another record high. However, it too formed an "inverted hammer" candlestick. When this pattern forms near the upper channel of an extended uptrend, it often leads to selling in the days that follow. Given what we've seen in the Dow lately, we certainly would not bet the bank on that idea. Nevertheless, a bit of caution, even in the large-caps, would be prudent.

Our only open position remains the StreetTRACKS Retail (XRT) short. So far, it's working out well and showing an unrealized gain of just under 2%. Relative weakness in the Retail Index ($RLX), which is now trading below its 50-day moving average, has generated decent short setups in the retail sector. As for longs, the Pharmaceutical HOLDR (PPH) that we discussed yesterday did not yet hit our trigger price. We continue stalking it for potential long entry above its hourly downtrend line.

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.