After beginning the day lower, stocks reversed to move into positive territory by mid-day, but afternoon weakness caused most of the major indices to post moderate losses. Both the S&P 500 and Dow Jones Industrial Average fell 0.4%. The small-cap Russell 2000 and S&P Midcap 400 indices each slipped 0.5%. Aided by relative strength in the large-cap tech arena, the Nasdaq Composite eked out a gain of 0.1%. All of the main stock market indexes settled just below the middle of their intraday ranges, indicating indecision into the close.

Total volume in the NYSE was 4% below the previous day's level, enabling the S&P to avert a "distribution day." Turnover in the Nasdaq ticked 3% higher, but the minimal 0.1% gain in the index was not enough for the index to score a bullish "accumulation day" that would have pointed to institutional buying. In both exchanges, volume has come in below 50-day average levels for the past nine consecutive sessions. When traders begin returning to their desks after Monday's Labor Day holiday, trading should begin to pick up. The big question, however, is which direction will mutual funds, hedge funds, and other institutions lay on the volume when they return?

With all the speculation over whether or not the Fed will cut interest rates at next month's meeting, many of the fixed-income (bond) ETFs have been seeing positive price action. Our long position in the iShares 20+ year Treasury Bond Fund (TLT), which we bought on August 24, is doing well, but several other fixed-income ETFs have also come across our radar. One such example is the iShares Corporate Bond Fund (LQD). Although it has been stagnant for several months, it broke out above an area of significant horizontal price resistance a couple days ago. Yesterday, it tested and held the breakout level, so it appears that LQD may be in the process of reversing its intermediate-term downtrend:



Helping to confirm the conclusion that LQD may be putting in a bottom is the longer-term weekly chart. As the chart below illustrates, LQD has formed a double bottom at its prior low from July of 2006:



Over the past two days, LQD has tested and held support of its breakout level, just below the $104.50 area. With its slight pullback off the August 29 intraday high, we feel an entry in LQD over yesterday's high of $104.80 presents an attractive risk/reward ratio. For minimal risk, the stop can logically be placed below the low of the past two days. However, be sure to give it enough "wiggle room" to prevent getting shaken out on a "stop hunt" below support of the breakout. Also, note that LQD will trade ex-dividend on Tuesday (the first business day of the month). As such, be sure to allow for the approximately 50 cents it will gap lower (and be redistributed in the form of a dividend). Regular subscribers should note our trigger, stop, and target prices for the LQD setup below.

Today, Federal Reserve Chairman Ben Bernanke is scheduled to speak about housing and the economy when it kicks off its annual retreat in Wyoming at 10 am ET. The opening comments from this event are always closely watched by market participants, and this will be the case even more so this year. With both the S&P 500 and Nasdaq Composite testing pivotal resistance of their intermediate-term downtrends, the reaction to today's comments could be the determining factor as to the stock market's overall bias in September.

Obviously, it's impossible to know how the market will react, no matter what Bernanke says. The only thing we can say with a reasonable amount of certainty is that trading is likely to be whippy and more erratic than usual today. Consider letting the market digest the morning comments and taking it easy with new positions ahead of the three-day holiday weekend. Right now, specific industry sector ETFs with relative strength or weakness are a safer bet than new entries in the ETFs that mirror broad-based indexes such as the S&P or Nasdaq. We continue stalking both the Oil Service HOLDR (OIH) and the iShares Nasdaq Biotech (IBB) for potential long entries.

Open ETF positions:

Long - TLT, DXD
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.