Limiting the stock market's recent price correction to just two days, the major indices raced higher yesterday, scoring their biggest gains in months. Stocks gapped several percent higher on the open, trended north throughout the morning, consolidated for a few hours, then made another huge advance in the afternoon. The S&P 500 rocketed 7.1% higher, its largest one-day gain since last October 28, when the index advanced more than 10%. The Nasdaq Composite and Dow Jones Industrial Average posted identical gains of 6.8%. Small-caps again took center stage, as the Russell 2000 zoomed 8.4% higher. The S&P Midcap 400 climbed 7.4%. All the main stock market indexes closed at their best levels of the day, indicating no signs of intraday "profit taking" into the close.

Despite the monstrous rally, lower turnover across the board was a disappointment. Total volume in the NYSE declined 22%, while volume in the Nasdaq was 13% lighter than the previous day's level. Considering the humongous percentage gains in the broad market, one might have expected the power of institutional buying activity (reflected by higher volume) to accompany the rally, but mutual funds and hedge funds appeared to be somewhat on the sidelines. Nevertheless, one should also keep in context that the prior day's volume levels were largely inflated by the "quadruple witching" options expiration. Lighter volume notwithstanding, other market internals were quite strong. In the NYSE, advancing volume destroyed declining volume by a margin of 35 to 1. The Nasdaq adv/dec volume ratio was positive by 15 to 1. These extremely positive readings tell us practically every industry sector participated in yesterday's rally, not only the beaten-down financials.

Just before yesterday's close, we sent an Intraday Trade Alert to subscribers of The Wagner Daily, informing them we were taking profits on Ultra QQQ ProShares (QLD), which we had been long since March 17. At the time of entry, our original price target was just over the $28 area, which QLD approached in the final minutes of trading. Given the huge intraday rally, it made sense to sell into strength, near the area of our price target. Upon doing so, we locked in a gain of just over 16% (4 points). The entry and exit price of our QLD trade is shown on the daily chart below:



The buy setup in Internet HOLDR (HHH), which we illustrated in yesterday's commentary, triggered for entry. As per the plan, we bought HHH when it rallied above the high of its horizontal price resistance. Presently, the trade is showing an unrealized gain of just under one point. The breakout in HHH is shown on the daily chart below:



In yesterday's newsletter, we illustrated the intermediate-term downtrend lines in the S&P 500, Nasdaq Composite, and Dow Jones Industrials, which were anchored with last week's highs. Since yesterday's gains obviously caused the main stock market indexes to rip through last week's highs, the major indices have technically transitioned into new intermediate-term uptrends. Further, all five of the main stock market indexes we monitor have moved back above their 50-day moving averages, an intermediate-term trend indicator that is closely watched by institutions. Look for the 50-day moving averages to act as support on any subsequent pullbacks this week.

Even though the short and intermediate-term trends are now bullish, it's important to remember the long-term trends are still "down." The main stock market indexes would have to rally much higher to even have a shot at reversing the long-term downtrends, which have been in effect for more nearly a year and a half. Therefore, in the back of your mind, stay mentally prepared for the fact that, perhaps in the not-too-distant future, the dominant long-term downtrends could eventually pressure the intermediate-term trends enough to force us to abandon long positions and jump back onto the short side of the market. But until that happens, let's take advantage of the developing opportunities that are starting to present themselves on the buy side.

Open ETF positions:

Long - HHH, UGA, USO, SLV
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.