Gapping higher on the open, stocks got off to a positive start yesterday. The major indices subsequently grinded higher in the morning, then drifted back down in the afternoon, finishing the day near their positive opening prices. The S&P 500 gained 0.7%, as both the Nasdaq Composite and Dow Jones Industrial Average climbed 0.6%. Small and mid-caps led the way higher. The Russell 2000 and S&P Midcap 400 indices rose 0.9% and 1.5% respectively. The S&P and Dow closed in the middle of their intraday ranges. The Nasdaq finished at the bottom third of its range.

Total volume in the NYSE swelled 17% above the previous day’s level, while volume in the Nasdaq increased 8%. The higher volume gains across the board enabled both the S&P and Nasdaq to score a bullish “accumulation day,” indicative of institutional buying. As turnover had backed off in recent days, the faster pace of trading that accompanied yesterday’s advance was an encouraging sign that funds remain in buying mode.

In yesterday’s commentary, we said, “Over the next few days, PowerShares Base Metals (DBB) could break out above a level of horizontal price resistance that enables it to make a nice move. . .DBB has “undercut” (and held) more significant support of its 50-day moving average. Such a shakeout below the 50-day MA could give DBB the momentum to finally break out above its consolidation and make another leg higher. . .If DBB clears resistance of the September 30 high ($18.41), it could quickly attract the necessary buying interest to propel it to a fresh 52-week high.” As if right on cue, DBB rocketed 5% higher yesterday, easily clearing its short-term resistance, and closing at a fresh 52-week high. Take a look:


If you missed our initial buy entry into DBB, and didn’t buy on yesterday’s opening gap above resistance of the September 30 high, we do not recommend buying the breakout today. This is because the rally in DBB is somewhat “out of sync” with the broad market. While the S&P 500 has had four straight days of gains, since bouncing off its 50-day moving averages, DBB only got in gear yesterday. As such, if the S&P pulls back for a few days, it could weigh on DBB as well. Therefore, if still looking for an entry into DBB, a wiser plan of action may be to wait for the first pullback after its breakout, which might coincide with a pullback in the broad market as well. Alternatively, DBB could drift slightly lower to form a “bull flagpattern on its daily chart. If it does, the first solid gap above the upper channel of the flag could be buyable.

First Trust Natural Gas (FCG), which bounced off support of its multi-month uptrend line and “undercut” its 20-day EMA last week, was another strong performer yesterday. Gaining 4.1%, FCG also settled at a new 52-week closing high. As FCG moves firmly above its prior highs, we’ll trail the stop higher in order to maximize gains and protect profits on our position:


Since pulling back to support of their 50-day moving averages on October 2, the major indices have demonstrated firmly bullish price action that’s indicative of a technically healthy market. However, four consecutive days of gains have now caused the main stock market indexes to run into resistance of their prior highs from late September. Based on the solid breadth of the rally, as well as improving volume patterns, it’s certainly realistic to expect stocks to eventually break out above their September highs. But if there is to be a short-term correction, resistance of the late September highs is the logical place where the major indices may do so. Below is a chart of the S&P 500 SPDR (SPY), a popular ETF proxy of the S&P 500 Index:


Next is the daily chart of the Dow Jones DIAMONDS (DIA), an ETF proxy for the Dow Jones Industrial Average:


Finally, here’s the popular Nasdaq 100 Index Tracking Stock (QQQQ):


All three broad-based ETFs shown above formed “doji star” candlestick patterns yesterday. This pattern is neither bullish, nor bearish. Rather, it indicates indecision. Though stocks closed higher because of positive opening prices, there was intraday indecision. More importantly, notice how yesterday’s high of each index neatly correlates to resistance of its respective prior high from late September. This could provide traders with a good excuse to engage in a bit of profit taking. Still, there doesn’t need to be a pullback. A correction by time, where stocks consolidate in a sideways range in the short-term, is a very possible scenario as well. Regardless, beware of new buy entries after the S&P has made four straight days of gains into resistance of its late September highs. Waiting for at least a modest pullback, or correction by time, will provide you with a much better reward-risk ratio on new entries.

Open ETF positions:

Short – MOO

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.

Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (, 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.

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