Pullback setup in the Japanese Yen ETF

After opening near the flat line, the major indices initially attempted to follow through on yesterday's bullish momentum, but stocks turned tail at mid-day, thereafter heading south throughout the afternoon. The S&P 500 and Dow Jones Industrial Average gave back about two-thirds of the previous day's gains, falling 1.9% and 2.1% respectively. The Nasdaq Composite surrendered an earlier 1.0% gain to finish 1.1% lower, but the index showed relative strength by retracting only a little more than a third of Tuesday's gain. The small-cap Russell 2000 shed 2.1% and the S&P Midcap 400 lost 1.8%. Opposite of the previous day, all the main stock market indexes closed near their intraday lows.

Total volume in the Nasdaq ticked 5% higher, causing the index to register a bearish "distribution day." Volume in the NYSE, however, was on par with the previous day's level. Volume has slowly been returning from last Friday's lethargic, pre-holiday pace, but turnover in both exchanges remained below average levels; it has been ten days since trading in either exchange was greater than average. Since stocks have been in a choppy, sideways range for the past several weeks, it's not surprising that institutions have largely been sitting on the sidelines. When the main stock market indexes eventually break out of their recent ranges, in either direction, the move will likely be accompanied by a volume spike as well.

One of the major drags on the stock market yesterday was the weak performance in the financial sector. Showing clear relative weakness to the major indices yesterday, the Insurance Index tumbled 4.4%, the Bank Index ($BKX) 3.8%, and the Securities Broker/Dealer Index ($XBD) 2.8%. The $BKX has been consolidating near the lows of its recent range, in a tight channel, over the past four days. Any further weakness in today's session will likely cause the index to lose short-term support:

If the $BKX happens to break support in today's session, the various financial ETFs may be worth a look on the short side. However, because the 50-day moving average is about 5.6% below the current price of the $BKX, any short entries in the financial sector should initially be entered with a very short-term time horizon, perhaps an expectation of 1 to 3 days. Presently, we're positioned in the inversely correlated UltraShort Financials ProShares (SKF), which we bought on the break of its downtrend line a few days ago. If the $BKX breaks down and quickly finds major support at its 50-day moving average, we'll simply trail a tight stop on SKF to lock in any gain. But if downside momentum on the financials really gets moving, we'll give SKF a little looser leash and slightly longer holding period.

CurrencyShares Japanese Yen (FXY), which is presently showing a two-point gain since our original entry, is shaping up nicely for a swing trade on the long side (if you're not already in). Unlike most ETFs, FXY has a very low correlation to the direction of the stock market, making it an ideal trade candidate in an indecisive market. It recently broke out above its downtrend line, is showing relative strength, and is now on a very short-term pullback to support of its 10-day moving average. A buy entry above the 20-period exponential moving average on the hourly chart would coincide with a break of its hourly downtrend line, which should subsequently enable FXY to resume its newly established uptrend. The buy setup is shown on the hourly chart below:

As for the broad market's condition...well, well, well! The S&P and Dow have once again closed right at their pivotal 20-day exponential moving averages, which have acted like electromagnets for the past two weeks. Take a look:

We hate to sound like a broken record (remember vinyl?), but, other than a few very short-term plays, there's really not much to do until stocks make a definitive, convincing move in one direction or the other. With the 50-day moving averages closing in from below, and the 200-day moving averages closing in from above, it shouldn't be much longer until we see the trend resolution we've been discussing. The big question, of course, is which direction will the breakout be? Obviously, nobody knows for sure, but the great news is that we don't need to worry about it -- we'll be prepared either way. Like we said in yesterday's closing commentary, "Keeping a healthy portion of cash in your portfolio is a great way to prevent churning your account until the market eventually makes up its mind."