Monday's correction proved to be rather short-lived, as the major indices snapped back to zoom above last week's highs. Stocks opened near the flat line, drifted higher throughout the morning, then picked up bullish momentum in the afternoon. The Nasdaq Composite jumped 4.1%, the S&P 500 3.2%, and the Dow Jones Industrial Average 2.5%. The small-cap Russell 2000 and S&P Midcap 400 indices climbed 4.5% and 3.7% respectively. It's bullish that the relative weakness the Nasdaq Composite displayed the previous day only lasted one session, as the index reclaimed leadership yesterday. Each of the main stock market indexes closed at its absolute best level of the day.

Yesterday was the third time within the past week that the major indices scored large gains of more than 3%. However, one differing factor between yesterday and the other two instances was that higher volume failed to accompany the strong advance. Total volume in the NYSE declined 21%, while volume in the Nasdaq was 2% lower than the previous day's level. In both exchanges, volume was below average levels. Trading in the NYSE also limped in to register its lowest level in a month. Such a slow pace would have been perfect if yesterday was a "down" day, but it's the opposite of what the bulls want to see on a strong day of gains. Higher turnover would have instead given yesterday's rally the increased "punch" resulting from institutional buying, such as was the case on March 10 and 12.

In yesterday's Wagner Daily, we looked at the potential buy setups of DB Commodity Index Fund (DBC) and U.S. Oil Fund (USO). As anticipated, both ETFs broke out above their short-term consolidations, officially triggering our buy entry into USO. Since this is the first time USO has closed above its 50-day moving average in eight months, we expect bullish momentum to send it higher, at least in the short to intermediate-term. On the daily chart below, we've circled our approximate target area in USO, which is a test of its January 2009 high:



U.S. Gasoline Fund (UGA), a sibling of USO, also broke out above a substantial band of price consolidation yesterday, hinting at the likelihood of increasing gas prices at the pump in the coming days and weeks. Notably, volume in UGA also spiked to twice its average level, pointing to buying interest on the part of institutions:



Recently, we illustrated how last week's broad-based market reversal was a "V bottom" formation, indicating the angle of the preceding downtrend was roughly equal to the angle of the new (short-term) uptrend. This pattern often makes it challenging for risk-averse traders to capitalize on the rally. But one of our favorite ways to jump into a high-momentum rally in the broad market, while taking only minimal risk, is to wait for one of the major indices to pull back and "undercut" support of its 20-period exponential moving average on the hourly chart (20-EMA/60 min.), then buy the first move back above it. The "undercut" is bullish because it shakes out the "weak hands" who sell at the first sign of a pullback, thereby eliminating a degree of overhead supply. Then, as prices move back up, those same people end up chasing the price higher, looking for a re-entry, and contributing to the bullish momentum.

Because there was a lot of broad market divergence in Monday's pullback, both the S&P 500 and Dow held above their 20-EMAs/60 min., but the Nasdaq brothers (Nasdaq Composite and Nasdaq 100) "undercut" the 20-EMA/60 min. This gave us a heads-up to watch the performance of the Nasdaq in yesterday's session, as a quick recovery back above the 20-EMA/60 min. presented a decent buy entry. One hour after yesterday's opening bell, we observed the Nasdaq was not only holding above its 20-EMA/60 min., but was showing bullish divergence to the other main stock market indexes as well. As such, we sent an Intraday Trade Alert to subscribers, informing them we were buying Ultra QQQ ProShares (QLD), the leveraged ETF that tracks the performance of the Nasdaq 100 Index. The QLD "undercut" of its 20-EMA/60 min. is shown on the hourly chart below:



With the Nasdaq 100 back above its 50-day moving average, QLD is now looking more promising for the intermediate-term, as well as short-term. However, given the light volume of yesterday's rally, we would not be surprised if QLD pulled back within the next several days. Still, even if it does, our entry price was low enough that we can now withstand a substantial pullback, while risking only a minimal amount of initial capital. Presently, QLD is already showing an unrealized gain of 5% (1.3 points) since yesterday morning's entry.

In case you are not aware, today is a "Fed day." At 2:15 pm ET, the Federal Reserve Board is scheduled to announce any changes to economic policy. With the Fed Funds Rate already at zero percent, traders' focus will be on the interpretation of forward-looking comments made by the Fed, rather than whether or not interest rates are lowered. As per standard Fed day protocol, we expect subdued trading in the first half of the day, followed by high volatility and whippy trading later in the afternoon.

Open ETF positions:

Long - QLD, USO, UGA, SLV, DGP
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.