Stocks in "no man's land" for now. . .

Bearish momentum from last week's losses spilled into the new week, causing the main stock market indexes to move sharply lower and break below key support of their 50-day moving averages. After trending steadily south throughout the entire day, the Dow Jones Industrial Average finished 1.5% lower, the Nasdaq Composite lost 2.1%, and the S&P 500 shed 2.3%. The small-cap Russell 2000 and S&P Midcap 400 indices declined 2.6% and 2.8% respectively. A slight bounce in the final hour of trading lifted stocks off their worst levels of the session; still, the major indices closed near the bottom quarter of their intraday ranges.

Turnover was mixed. Total volume in the NYSE rose 13% above the previous day's level, causing the S&P 500 to register a bearish "distribution day." Yet, despite the instance of institutional selling, NYSE volume remained below its 50-day average level. Total volume in the Nasdaq eased 7%. Market internals were equally ugly in both exchanges. In the NYSE and Nasdaq, declining volume exceeded advancing volume by a margin of approximately 7 to 1.

While yesterday's sell-off put pressure on most ETFs, CurrencyShares Japanese Yen (FXY) rallied 1.3% and logged its fourth straight day of gains yesterday. But rather than holding through a pullback, in anticipation of a slightly higher profit, we made a judgment call to sell our FXY position into strength yesterday, netting a gain of nearly five points in just three days. As you may recall, we bought FXY after it corrected down to major support of its 50-day MA for the first time since its five-month uptrend began. The daily chart of FXY is shown below:

Upon buying FXY on the January 7 open, our initial price target for this swing trade was a test of the mid-December high, around the $114 area. However, because FXY rapidly moved higher in the days that followed, we took the less risky approach by selling into strength of the initial rally, two points shy of our original price target. FXY is indeed likely to eventually recover back to test its mid-December high, but will probably retrace lower, or at least consolidate, first.

In yesterday's market analysis, we illustrated how the benchmark S&P 500 closed the previous day at pivotal support of its 50-day moving average (MA), which had also converged with support of its intermediate-term uptrend line from the November 2008 low. Referring to the importance of this technical support level, we said of the S&P 500, ". . .if the index convincingly closes below its 50-day MA, after trading above it for less than two weeks, the market's bullish bias would quickly become jeopardized. If the late December "swing lows" become broken (below the 850 level in the S&P 500), we would begin looking for new short sale entries in the broad market, as a subsequent test of the 52-week lows would have a good chance of developing." Unfortunately, yesterday's sharp decline in the S&P 500 obviously caused the index to finish 2% below its 50-day MA, which is bearish. However, perhaps more importantly, the S&P 500 is still approximately 2.5% above more significant support of its prior lows from late December. The dashed horizontal line on the daily chart below marks this next major area of price support, around the 850 level:

In addition to the S&P 500, both the Nasdaq Composite and Dow Jones Industrial Average have fallen back below their 50-day MAs as well, but remain above their late December lows. Though it's negative that all three indexes failed to hold above their 50-day MAs yesterday, a one-day breach of an important moving average is not enough to declare a definitive break of support. In uptrends, stocks and ETFs will frequently probe below support of their 50-day MAs for just one day, triggering protective stop orders, then snap back above their 50-day MAs the following day. When such action occurs, it is commonly referred to as a "stop hunt," as savvy traders accumulate shares at lower prices by triggering sell stop orders of those whose stops are a bit too tight. If you've been in the business of trading for any decent length of time, you've surely had the experience of selling your position at the lows, only to watch it rip in your originally anticipated direction the following day. Over the years, we've been there many times too, but we've learned to power of calmly and confidently re-entering good trades whenever that happens.

Obviously, we have no way of knowing whether or not yesterday's break of the 50-day MAs was merely a "stop hunt" until it's already in hindsight. However, even if the major indices fail to move back above their 50-day MAs today, the intermediate-term uptrends that have been in place for the past two months technically remain valid -- just as long as the "swing lows" from late December are not violated. Holding above those lows will enable the major indices to continue their patterns of "higher lows" and "higher highs" that defines the current intermediate-term uptrends.

Quarterly earnings season officially kicked off with the latest corporate report from Alcoa, Inc. (AA) after yesterday's close. With the major indices now below their 50-day MAs, but still above their "swing lows" from December, stocks are essentially in "no man's land." But the good news is that the reactions to the plethora of pending earnings reports should prevent the major indices from hanging out in "no man's land" for long. Again, we'll be looking to enter new short positions if the December "swing lows" are broken, but we're not interested in getting short as long as the developing series of "higher lows" and "higher highs" remains intact on the daily charts. Conversely, new long positions only make sense if the major indices manage to reclaim their 50-day MAs. Until either of those scenarios occurs, we've shifted to a neutral bias, and are primarily waiting on the sidelines for the market to indicate its next move.

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Open ETF positions:

Long - SLV, GDX, TAN
Short - (none)

NOTE: Regular subscribers to The Wagner Daily receive daily updates on the open positions above, as well as new ETF trade setups, including trigger, stop, and target prices. Intraday Trade Alerts are also sent via e-mail and/or mobile phone text message on as-needed basis.

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Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner's new book, Trading ETFs: Gaining An Edge With Technical Analysis, was published by Bloomberg Press in August, 2008. Wagner also appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and financial conferences around the world.

For a free trial to the full version of The Wagner Daily above, which includes detailed ETF trade setups and daily position updates, or to learn about our other newsletters, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com.