Following up last Friday’s lethargic session with a large, broad-based advance on higher volume, stocks scored their sixth straight day of gains yesterday. The major indices gapped sharply higher on the open, then trended steadily north throughout the entire session. The S&P 500 jumped 2.2%, as the Nasdaq Composite and Dow Jones Industrial Average scored matching gains of 2.0%. The small-cap Russell 2000 and S&P Midcap 400 indices increased 2.1% and 2.4% respectively. All the main stock market indexes finished at their best levels of the day, showing no signs of deliberation into the close.

The major indices registered gains in each of the past six sessions, but yesterday was the first of those days in which higher turnover accompanied the advance. In the NYSE, total volume was 14% higher than the previous day’s level. Trading in the Nasdaq similarly increased by 3%. Still, despite the faster pace of trading, it’s notable that volume in both exchanges remained well below 50-day average levels. This is because turnover receded in each of the preceding five days. Overall, it was positive that stronger volume finally accompanied an “up” day, as it hints that institutions may be cautiously returning to the buy side of the market. However, it was disappointing that volume in either exchange failed to even exceed its average reading. Advancing volume in the NYSE trounced declining volume by a margin of 17 to 1, indicating the rally was very broad-based. The Nasdaq adv/dec volume ratio was obviously positive as well, but only by a ratio of 4 to 1. The extreme adv/dec volume ratio in the NYSE, combined with volume that was still below average, smelled of a “short squeeze” that forced the bears to cover their positions.

Although a laggard for the past several months, the real estate sector showed major relative strength to the broad market yesterday, and that strength coincided with a breakout above an intermediate-term downtrend line. With initial signs of institutional sector rotation back into real estate, you may want to put REIT ETFs on your watchlist for potential entry (with partial share size) if the relative strength persists and the breakout holds in the coming days. Below is the daily chart of iShares U.S. Real Estate Index Trust (IYR), which surged 4.7% higher yesterday:


Recently, we sold our position in U.S. Oil Fund (USO) into strength, in order to lock in a small gain on the trade. Though we liked the breakout, our main concern was a U.S. dollar that was attempting to bottom and form a base. However, with the dollar now in danger of failing its recent trend reversal and heading to new lows, USO may be poised to break out of its short-term consolidation and make another leg higher. If it does, we may re-enter USO on the long side. The setup is shown on the daily chart of USO below:


Yesterday, the Dow Jones Industrial Average zoomed above resistance of last month’s high to finish at a fresh 52-week high. The S&P and Nasdaq failed to follow suit, though both indices overcame resistance of their closing highs from September of this year. With the Dow back above the 10,000 mark, the popular financial media outlets can go about their jolly business of cheerleading once again. But a look at the long-term weekly chart shows the blue-chip index is again approaching major resistance of its two-year downtrend line that we pointed out a few week ago. This is shown on the weekly chart below:


The Dow has closed at a new 52-week high, while the Russell 2000 is still trading below its 50-day moving average, and well off its high. With blue chips now pulling the market higher, but small-caps still weighing on the market, divergence amongst the major indices is becoming more substantial. In this situation, it may be beneficial to average all the market segments together, in order to present the most accurate technical picture of current state of the overall stock market. One suitable ETF that seeks to provide such a representative picture of the whole market is Vanguard Total Stock Market ETF (VTI). Its daily chart is shown below (moving averages removed so you can more easily see the pattern):


Curiously, the daily chart of VTI now shows a nearly picture perfect “head and shoulders” pattern. Last week, we mentioned the S&P 500 was also forming a “head and shoulders” pattern as well, but yesterday’s rally put the right shoulder well above the left shoulder. Although it’s notable that an ETF representative of the entire stock market is showing such a well-formed bearish pattern, we are NOT suggesting new short entries right now. Just like every other short-term correction since the March 2009 lows, stocks once again seem determined to reverse parabolically higher, regardless of any patterns that might normally present a very valid argument for the bears. Nevertheless, it’s our job to continually keep subscribers informed of key patterns we see developing, both bullish and bearish.

Yesterday, the Semiconductor HOLDR (SMH) and S&P Financial SPDR (XLF), two of the biggest drags on the stock market during the recent correction, both closed at resistance of their 50-day moving averages. As the key resistance levels of two important ETFs coincide with six consecutive days of gains in the broad market, one might ordinarily expect stocks to pause and catch their breath from the bounce off the lows — but these are not “ordinary” times. Chasing stocks at current levels, after such a short-term run, may not present a very positive reward-risk ratio. However, stepping in front of the bullish momentum to blindly sell short is clearly not advisable either. If re-entering the market on the long side, now that we’ve at least seen one session of higher volume gains, one might strongly consider using reduced position size, such as a half position, in order to minimize risk. As we said in yesterday’s commentary, ” It’s starting to look as though the major indices may be entering into a range-bound period of trading for the next several months, in which the bulls and bears share a balance of power.” If the S&P and Nasdaq head lower upon testing their October highs, it would serve to help confirm that scenario.

Open ETF positions:

Long – UUP
Short – TBT (an inversely correlated “short ETF”)

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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