After days and days of 3% to 5% swings in the major indices, price action moderated to its tightest levels in weeks. Stocks traded in a narrow, sideways range throughout the day and finished with mixed results, as investors awaited details of the government's financial bailout package. The Nasdaq Composite ticked 0.1% higher, the S&P 500 dipped 0.2%, and the Dow Jones Industrial Average fell 0.3%. Showing the most relative strength was the large-cap Nasdaq 100 Index, which rallied 0.8%. Although small caps showed incredible relative strength during the September 18 - 19 rally, they curiously showed significant relative weakness yesterday, causing the Russell 2000 to slide 1.6%. The S&P Midcap 400 fared only slightly better, as the index declined 1.1%. The main stock market indexes closed near the bottom third of their intraday ranges, but off the day's lows.

Total volume in the NYSE was 9% lower than the previous day's level, while volume in the Nasdaq similarly declined 11%. The third straight day of lighter volume in the NYSE confirms investors and traders have primarily been waiting on the sidelines until the details of the Fed bailout package are agreed upon by Congress. When resolution is reached, expect a large surge in turnover, as well as the return of high volatility. Like the closing prices, market internals were mixed. In the NYSE, declining volume marginally exceeded advancing volume, but the Nasdaq adv/dec volume ratio was positive by nearly 2 to 1.

In yesterday's commentary, we pointed out the PowerShares DB Commodity Index (DBC) as a potential buy setup in the coming days. Since it remained in a tight range near its recent high, the "bull flag" pattern remains intact, as does the setup. The ideal buy point is now a rally above its three-day high of $36.17. More specific commodity ETFs such as Gold (GLD, DGP) and Crude Oil (USO) have similar chart patterns to the diversified DBC. CurrencyShares Euro Trust (FXE), which follows the price of the euro vs. U.S. dollar, has also been forming a "bull flag" over the past three days, indicating the likelihood of further weakness in the U.S. dollar. Commodities often move higher as the dollar gets weaker, and this appears to be happening again.

We view yesterday's lows and highs in the main stock market indexes as pivotal technical levels that will determine the short-term direction of the market. The intraday lows of the major indices approximately correlate to pivotal support of their 61.8% Fibonacci retracements (from their September 18 low to September 19 highs). If those lows are convincingly violated, stocks will likely retrace all the way back down to test their September lows. However, a rally above yesterday's highs could spark a high-momentum rally, as investors would anticipate a move back up to the September 19 highs. The reaction to final details of the Fed rescue package will have a large bearing on which of those two scenarios occurs. On this note, remember it's the reaction to key news releases that matters, not the actual details of the news.

Surprisingly notable relative weakness in small-caps, which led the broad market higher late last week, caused our new long entry into Ultra Russell 2000 ProShares (UWM) to quickly stop out yesterday. However, as the reward/risk ratio of being long at current levels of this pullback is so high, we wanted to maintain at least one bullish position. But because the Russell 2000 was so weak, while the Nasdaq 100 showed significant bullish divergence, we bought into Ultra Nasdaq 100 ProShares (QLD), rather than re-entering UWM. So far, that analysis is working out well, as UWM lost 1.3% yesterday, but QLD gained 2.1%. Trade setups with a very high reward/risk ratio typically have a higher chance of stopping out on the initial entry, and may require a re-entry attempt or two in order to catch the potential profit. Conversely, trade setups in which the potential reward is only minimally greater than the risk of stopping out usually have a higher chance of success, but less potential profit.

Open ETF positions:

Long - QLD
Short - (none)