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Stocks kicked off the week in uneventful fashion, as the major indices opened slightly higher, drifted lower throughout the morning, then chopped around in a sideways range throughout the rest of the day. Like the previous session, the main stock market indexes finished with mixed results. Both the S&P 500 and Nasdaq Composite lost 0.1%. The Dow Jones Industrial Average declined 0.3%. The small-cap Russell 2000 and S&P Midcap 400 indices showed relative strength by scoring identical gains of 0.7%. The S&P 500, Dow Industrials, and Nasdaq Composite all settled in the bottom third of their intraday ranges.

Turnover receded to its lightest levels in weeks. Total volume in the NYSE declined 30%, while volume in the Nasdaq limped in 18% below the previous day's level. In both exchanges, trading dropped well below 50-day average levels. However, the lower turnover was positive because it was basically just a consolidation day. Higher volume with little changed prices would have pointed to "churning," a bearish event that occurs when stocks rally, then trade sideways on increasing volume. In both the NYSE and Nasdaq, advancing volume was on par with declining volume.

On July 15, we bought the UltraShort Oil and Gas ProShares (DUG), which moves in the opposite direction of the energy sector. However, we scratched the trade intraday due to bullish reversal that was brewing in the broad market. Even though the oil sector was weak that day, we were concerned that energy issues would get a solid boost from general strength in the broad market regardless. We were wrong. The oil-related ETFs continued to fall apart throughout the day, propelling the inversely correlated DUG higher. Oil moved lower over the next two days, but stabilized and began to bounce higher on July 18. Now out of sync with the broad market, the oil sector continued bouncing yesterday as well. This caused DUG to pull back to support of its uptrend line off the July 2 low, as well as its 10-day moving average. This is shown on the daily chart of DUG below:

Now that DUG has nearly retraced back to the level we bought it at last week, the convergence of 10-day MA and trendline support makes it a low-risk buy entry at its current level (remember that buying DUG is basically the same as selling short the oil and gas sector). Nevertheless, despite the short-term trade setup, realize we are not suggesting oil has definitively formed a top. The correction in oil shares simply has not been substantial enough to make such an assessment. Rather, DUG is merely presenting itself as a short-term setup that astute traders may profit from.