Showing initially encouraging signs of resilience, stocks consolidated near their previous day's highs before finishing yesterday's session in mostly positive territory. Adding another 1.0% to Tuesday's 7.1% advance, the Nasdaq Composite showed bullish divergence again. The Dow Jones Industrial Average eked out a gain of 0.1%, as the S&P 500 edged 0.2% higher. The only one of the major indices to finish in the red yesterday, the small-cap Russell 2000 slipped 0.4%. The S&P Midcap 400 conversely gained 0.4%. The main stock market indexes finished near the middle of their intraday trading ranges, but just above Tuesday's highs.

Turnover pulled back from Tuesday's rapid pace. Total volume in the NYSE receded 20%, while volume in the Nasdaq declined 9% below the previous day's level. Lighter volume on a consolidation day that follows a big rally is common. Higher turnover would have been negative, as it would have pointed to institutional selling into strength ("churning"). Instead, the bulls merely took a rest. Market internals remained positive. In the NYSE, advancing volume exceeded declining volume by 3 to 2. The Nasdaq adv/dec volume ratio was positive by just under 3 to 1.

In yesterday's commentary, we illustrated how Gold Double Long (DGP) and iShares Silver Trust (SLV) had come into support of their 50-day moving averages, as well as their primary uptrend lines, thereby creating low-risk buying opportunities. On cue, both precious metals ETFs subsequently moved higher yesterday, keeping their multi-month uptrend lines intact. Now that both ETFs are attempting to resume their dominant uptrends, protective stops should definitely be kept below their lows of the past two days (plus some "wiggle room"). If the lows of the past two days are broken, hence breaking the primary uptrend lines as well, downward momentum could rapidly send DGP and SLV lower.

As we wait to see whether Tuesday's gigantic rally was the start of a significant bottom, or just a very short-lived bounce, we've been closely scanning various industry sector ETFs, seeking out both possible buying and short selling opportunities. If the stock market retains its present bullish momentum, we'll generally begin buying operations upon the formation of a "higher low" and subsequent "higher high" in one or more of the major indices. Waiting for such technical confirmation prevents us from prematurely trying to "catch a bottom." But if the current bounce stalls upon running into resistance levels, we may initiate new short sales in sectors with relative weakness. One such sector is Healthcare. Below, notice how several ETFs in this sector are still consolidating at their lows, even as the broad market bounces:







Ideally, we'd like to see these ETFs rally into resistance of their 20-day exponential moving averages, at least probing through them on an intraday basis. This could happen if the major indices make another leg up. However, the healthcare sector has been so weak that it's possible the associated ETFs will simply continue to trade sideways instead, correcting by time, rather than price. Either way, we'll be monitoring the price action in this sector for potential short entries, but only if we sense momentum from the stock market's bounce is beginning to fade. As for the long side, bullish patterns are virtually non-existent right now (other than precious metals). If the market's rally holds up, we should start to see the stronger sectors outperforming and making themselves known. Our radar antennae is up.

Open ETF positions:

Long - DGP, SLV, UGA
Short - (none)

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and Morpheus Trading Group, a trader education firm launched in 2001 that provides daily technical analysis of the leading ETFs and stocks. For a free trial to the full version of The Wagner Daily or to learn about Wagner's other services, visit MorpheusTrading.com or send an e-mail to deron@morpheustrading.com.