Like the previous day, stocks chopped around in a narrow range before finishing modestly higher. Blue chips showed relative weakness, causing the Dow Jones Industrial Average to slip 0.2%, but the Nasdaq Composite gained 0.5%. Both the S&P 500 and small-cap Russell 2000 ticked 0.1% higher, while the S&P Midcap 400 advanced 0.2%. This time, the major indices showed less conviction into the close and finished lower in their ranges. The Dow closed in the bottom third of its intraday range, the S&P 500 in the middle, and the Nasdaq in the upper third.

The broad market scored gains for the third consecutive session, but has done so on declining volume each day. Total volume in the NYSE fell 12% below the previous day's level. Turnover in the Nasdaq was fractionally lower. Yesterday, we said that "Until the exchanges begin to register higher volume gains ("accumulation days"), one of the main technical signals to start buying stocks again is lacking. When markets climb higher, but on declining volume, it only takes one day of institutional selling to erase many days of gains. We remain on alert for the first signs of institutional accumulation that could lead to low-risk buying opportunities." This cautious stance resulting from bearish volume patterns remains exactly the same going into today.

Since last Friday's surprise Fed move, the market has done little in the way of following through. All of the major stock market indexes have posted only moderate gains, and as volume has eased. Looking at the daily chart of the S&P 500, we see that the 200-day moving average has clearly become an obstacle. In each of the past three days, the index has neared its 200-day MA, but traders have not been interested in even probing above it. Even if the S&P manages to trade above its 200-day MA, the month-long downtrend line has descended to provide substantial resistance just above that:



A firm closing price above the downtrend line of the S&P 500, especially on higher volume, would obviously cause us to relinquish our bearish near-term bias. But until that happens, we must assume the current intermediate-term downtrend will remain intact, just as it has for the past month. The longer a trend has been in place, the more difficult it is to break because more and more traders and investors act on tests of trendlines as time passes. For that reason, the current risk/reward scenario in the broad market favors the short side. Going into today, we are stalking a couple of the broad-based indexes for potential short sale, using the inversely correlated UltraShort ProShares ETFs. If you're considering doing the same, we'll share with you the two ideal ways to initiate new short positions into the current retracement off the lows.

The first is to wait for an intraday break below the previous day's low, but being sure it's not just a shakeout a few cents below the low. This manner of entering short sales is the less risky of the two methods because it requires waiting for confirmation of the current upward momentum to reverse before jumping in on the short side.

The second method of short entry requires waiting for further gains that would lead to a test of resistance of the intermediate-term downtrend lines that have formed in the major indices. The benefit of this method is a potentially greater risk/reward ratio because the stop can be kept tighter, while also providing for a potentially large drop if the trade moves back to test the lows. The disadvantage, however, is that selling short into strength is theoretically riskier. Rather than waiting for confirmation of momentum reversal, it requires a leap of faith that the market will reverse shortly after testing the downtrend line.

Both methods of short sale entry described above are valid, so the "better" method just depends on your personal comfort level with risk. One final possibility to consider is combining both methods by initiating partial share size into strength, on the test of trendline resistance, then adding the remaining shares upon confirmation of the downward reversal. Regular subscribers to The Wagner Daily should note our detailed trigger, stop, and target prices for today's setup in the UltraShort Dow 30 ProShares (DXD) listed below. The only index we would avoid shorting is the Nasdaq, as it is showing the most relative strength of the major indices.

Open ETF positions:

Long - (none)
Short - (none)

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.