After opening near unchanged levels, the major indices pushed higher in the morning, drifted in a narrow, sideways range throughout most of the day, and then made a little push to new intraday highs in the final thirty minutes of trading. By day's end, stocks had logged another round of substantial gains, and also recovered all of this week's losses. The S&P 500 rallied 1.1%, the Nasdaq Composite 1.0%, and the Dow Jones Industrial Average 0.8%. The small-cap Russell 2000 and S&P Midcap 400 indices advanced 1.3% and 1.1% respectively. All the main stock market indexes closed just below their best levels of the day.

Thanks to a last-minute volume surge, turnover in both exchanges increased marginally above the previous day's levels. Total volume in the NYSE rose 6%, while volume in the Nasdaq ticked 2% higher. The Nasdaq's higher volume enabled the index to secure its second straight "accumulation day," indicative of buying amongst institutions. The S&P 500 logged its first "accumulation day" since registering five sessions of higher volume losses (aka "distribution") in recent weeks. Nevertheless, volume in both exchanges remained below 50-day average levels. As we're in the "summer doldrums," turnover is likely to remain slow for at least the next several weeks.

Throughout the market's short-term correction, the biotech and pharmaceutical sectors have shown relative strength. We're already long iShares Nasdaq Biotech (IBB), but we also like the pattern in Pharmaceutical HOLDR (PPH), which is breaking out above a multi-week band of consolidation. This is shown on the daily chart below:



On the longer-term weekly chart of PPH below, we see the ETF recently broke out above resistance of a downtrend line that had been in place for one and a half years. The daily chart breakout also correlates to a breakout of a "bull flag" on the weekly chart. With its current rally above the January 2009 highs, PPH is reversing its dominant long-term trend as well. While PPH may not move much in the short to intermediate-term, its clear, technical trend reversal makes it a viable option for a long-term investment account:



Yesterday, we entered a new short position in iShares China Xinhua 25 (FXI), which we have been stalking for the past several days. Though it's still above its 50-day MA, it has rallied into resistance of its prior base of support (which is new resistance), as well as resistance of its 20-day EMA. All of this is within the context of a "bear flag" pattern, which indicates the likelihood of another move lower in the coming days. The daily chart of FXI is shown below:



In the August 17 issue of The Wagner Daily, we discussed how the major indices would likely "undercut," then bounce off support of their 20-day exponential moving averages (EMAs), just as they have done on numerous occasions since the rally began in March of this year Four days later, that's exactly what has happened. The main stock market indexes closed slightly below their 20-day EMAs on August 17, began reversing higher on August 18, then secured further gains on August 19 and 20.

While the "undercut" and bounce off the 20-EMAs basically played out as we anticipated, yesterday's rally was admittedly a bit surprising to us. When stocks break down below support of an area of consolidation, it's not uncommon for them to rally back to test new resistance of that support level that was broken. But if the actual breakdown was on strong volume, stocks will usually just bump into resistance of the breakdown level, then slide back down to new lows. The closing prices of the main stock market indexes on August 19 were roughly equivalent to testing resistance of their breakdown levels. Combined with the five "distribution days" the S&P 500 had recently seen, odds therefore would have favored stocks heading back down yesterday, perhaps quite swiftly. Instead, the broad market kept chugging higher, perhaps even more convincingly than the previous day.

Overall, there's still a possibility the major indices will resume the correction that began last week, but the chances of doing so are now diminished because of yesterday's bullish action that enabled stocks to retrace more than two-thirds of their recent losses. Still, even if the broad market manages to rally back to test its prior highs, we would now be on alert for failed breakouts. It's rare, though certainly not impossible, that a breakdown below support of a bullish consolidation lasts only one day. It seems we're dealing with a rather confused market that's sending mixed signals to traders and investors.

Open ETF positions:

Long - IBB, DBO, FXB, DGP
Short - FXI, TWM (long an inversely correlated ETF)

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.