Just like the previous day, stocks spent most of the session trading in a narrow, sideways range, but this time a wave of buying in the final thirty minutes of trading lifted the major indices to firmly positive closing prices. Bouncing back from four consecutive days of losses, the benchmark S&P 500 advanced 0.9%. The Nasdaq Composite gained 0.8% and the Dow Jones Industrial Average rallied 0.7%. Small and mid-cap stocks, which fell the most during the market's recent correction, recovered the most yesterday. The small-cap Russell 2000 climbed 1.2%, as the S&P Midcap 400 finished 1.4% higher. The market's last-minute display of strength enabled all the major indices to close near their intraday highs.

Total volume in the NYSE declined 15%, while volume in the Nasdaq was 7% lighter than the previous day's level. As mentioned in yesterday's commentary, turnover is likely to remain light until after the Labor Day holiday has passed. In the NYSE, advancing volume exceeded declining volume by a solid margin of 11 to 2. The Nasdaq adv/dec volume ratio was positive by a ratio of just 2 to 1.

On August 26, we bought S&P 500 VIX Short-Term (VXX), an ETF designed to roughly follow the CBOE Volatility Index (VIX). Our initial entry was based on an "undercut" of its prior "swing low," which led us to believe a short-term bottom was shaping up. Several days later, on September 1, VXX jumped more than 5%, breaking out above resistance of its five-month downtrend line and 20-day exponential moving average (EMA) in the process. It consolidated in a tight range the following day, then pulled back substantially in yesterday's session. If you missed our initial entry into VXX and were looking for a secondary entry point, the current pullback may be attractive. On the daily chart below, notice that VXX closed right at convergence of its 20-day EMA and prior downtrend line. Since both of those levels were formerly acting as resistance, before VXX broke out, basic technical analysis implies the 20-day EMA and prior downtrend line should now act as the new levels of support:



Gold and Silver ETFs, which broke out above pivotal resistance levels on September 2 (analyzed in yesterday's newsletter), continued to cruise higher in yesterday's session. Closing above resistance of its June 2009 high, SPDR Gold Trust (GLD) rallied another 1.3% to finish at a fresh six-month high. This caused our position in Gold Double Long (DGP) to climb 2.4%. Gaining 4.7% yesterday (and a whopping 15% over the past two days), Market Vectors Gold Miners (GDX) continued to outperform the actual spot gold rally. Surprisingly, volume in GDX increased even more, rising to nearly 400% its average daily level. There's definitely some serious accumulation going on among the gold mining stocks, so any substantial pullback in GDX could provide a buying opportunity. A retracement and "undercut" of the 20-EMA on the hourly chart (presently at $42.37) could provide a relatively low-risk pullback buy entry into GDX.

Motoring 4.5% higher, iShares Silver (SLV) nearly doubled the performance of GLD yesterday. This is notable because, in yesterday's commentary, we said, " In the coming days, we'll be paying close attention to the relative performances of GLD versus SLV. Specifically, we want to determine whether GLD will continue to show relative strength to SLV, or if SLV starts to play catch up." So far, it looks as though SLV is showing short-term leadership between the two ETFs, but GLD is still closer to breaking out to an all-time high than SLV.

Because of the clear breakouts on their weekly charts, the sudden strength in GLD and SLV is not surprising. However, what we find interesting is the rally in precious metals has not coincided to weakness in the U.S. dollar. While there is not always a direct, inverse correlation to the value of the dollar and commodities such as gold and silver, it's been quite a long time since we have not seen that correlation. Though the PowerShares U.S. Dollar Bull (UUP) has been consolidating near its 52-week low, it has not broken down to a new low in more than a month. In fact, it may even be building a base to start a bullish trend reversal. Furthermore, recent volume patterns suggest a stealth accumulation of shares. If UUP reverses, PowerShares U.S. Dollar Bear (UDN) would obviously fail its consolidation near the high, thereby invalidating the potential breakout play in UDN we recently analyzed. On the daily chart of UUP below, notice that a rally above the September 1 high of $23.49 would correlate to a breakout above its 50-day moving average, as well as its 6-month downtrend line. Such a move would provide us with a nice buy entry on the trend reversal:



NOTE: The U.S. equities markets will be closed on Monday, September 7, in observation of Labor Day holiday. As such, The Wagner Daily will not be published that day. Regular publication will resume on Tuesday, September 8. Enjoy the long weekend.

Open ETF positions:

Long - DGP, VXX, IBB
Short - FXI, TWM, SRS (both TWM and SRS are inversely correlated "short" ETFs we're long)

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.