Traders returned from the holiday weekend in a bullish mood, causing stocks to gap substantially higher on the open. Unfortunately for the bulls, the major indices only traded in a choppy, sideways range throughout the rest of the day, but stocks still finished firmly higher across the board. The S&P 500 and Nasdaq Composite scored matching gains of 0.9%, while the Dow Jones Industrial Average advanced 0.6%. The small-cap Russell 2000 rallied 1.1% and the S&P Midcap 400 tacked on 1.3%. Although the intraday trading range of the S&P 500 was only seven points, the main stock market indexes closed near their best levels of the range-bound day.

Not surprisingly, volume increased over last Friday's light, pre-holiday levels. Total volume in the NYSE was 28% higher than the previous day's level, as volume in the Nasdaq rose 17%. Technically, the S&P 500 and Nasdaq Composite both registered a bullish "accumulation day" with yesterday's higher volume gains. However, considering that turnover in the Nasdaq failed to even exceed its 50-day average level, the stock market's gains were still realized with relatively tepid volume. In the NYSE, advancing volume exceeded declining volume by a margin of less than 2 to 1, indicating that yesterday's rally was somewhat lacking in breadth. At 7 to 2, the adv/dec volume ratio in the Nasdaq was better.

From mid-July through mid-August of this year, banking, insurance, real estate, and other financial sub-sectors showed relative strength and leadership within the broad market. But over the past several days, we've begun noticing subtle signs of institutional sector rotation out of financials, and back into technology sectors. The Semiconductor Index ($SOX), for example, cruised 2.3% higher yesterday, as the KBW Bank Index ($BKX) lost 0.3%. Over the past two days, the $SOX has gained 4.0%, but the $BKX has only managed to climb 0.5%. If the shift back into tech stocks is not just a short-lived aberration, the present rotation into growth-oriented, tech-related sectors could be considered bullish for the market. However, if the heavily-weighted financials suddenly start to lose support, it could have a detrimental effect on any new rally attempts in the broad market.

Even though the $SOX broke out above the high of its recent consolidation yesterday, the chart pattern of the Seimconductor Index, as well as the associated ETFs, is not something we're very excited to jump into. Below, the highlighted area on the daily chart of the $SOX illustrates why we will probably pass on buying breakouts in any semiconductor ETFs right now:



Another Nasdaq-related sector we like better than semiconductors is biotechnology. Unlike the semiconductor ETFs, which failed their recent breakout attempts, then rallied back, biotech ETFs, such as iShares Nasdaq Biotech (IBB), have been building a nice base of support near their recent highs. If IBB breaks out above yesterday's high, it will break out above a key area of horizontal price resistance. This is shown on the longer-term weekly chart below:



We've been long IBB for the past month, and it's presently showing a two-point gain since our entry. However, we still only have a half-sized position. Therefore, we plan to add additional shares to IBB if it convincingly rallies above yesterday's high (over the $80 level). Scaling into the IBB position with partial share size, rather than buying full position size at once, enabled us to have minimal risk while waiting for IBB to break out above its current base. At the same time, it prevented us from potentially missing the boat if IBB continued higher without pulling back several weeks ago.

The closely-watched spot gold commodity opened the regular trading session above the paramount 1,000 resistance level yesterday morning, but subsequently drifted lower throughout the day, closing the NYSE trading session just a few dollars short of 1,000. Clearly, there's a very big tug-of-war going on behind the scenes. The opening strength in gold coincided with PowerShares U.S. Dollar Bull (UUP) gapping down to a new 52-week low. However, because UUP only "undercut" support of its August low by a few cents, it remains on our radar for a potential bullish reversal play. It would not surprise us if the gap down was just a "shakeout," one last attempt to get rid of the remaining dollar bulls before buyers step in. If UUP immediately gaps and holds above yesterday's high, in today's session, it would lend credence to that notion.

The iPath S&P 500 VIX Short-Term (VXX), which we bought on the breakout above its five-month downtrend line and 20-day exponential moving average, hit our protective stop yesterday. Though the setup looked great for short-term strength at the time of entry, VXX completely failed to hold support of its prior downtrend line and 20-day EMA when it pulled back last week. As such, there's no reason to remain long the position. Fortunately, because our breakout entry was at the right price, our loss on the trade was less than average.

Dare we say the daily chart of the S&P 500 may be forming the right shoulder of a bearish "head and shoulders" chart pattern? In late June and early July of this year, we observed the same formation, albeit with a slightly longer time frame. But a few weeks later, the broad market reversed sharply and rallied to new highs. Because that head and shoulders pattern failed to follow-through to the downside, we're a bit hesitant to place much emphasis on the same "head and shoulders" pattern that is forming now. Nevertheless, it would be a disservice to our valued subscribers if we observed this bearish pattern and failed to at least report it. For the time being, we'll simply take the pattern for what it's worth -- a potential early warning sign to the bulls. But for now, it is not a good enough reason to blindly begin aggressive short selling operations in the market. We'll continue to monitor the development of this "head and shoulders" pattern, and will keep you updated with any important technical signals or changes we observe.

Open ETF positions:

Long - DGP, IBB
Short - FXI, TWM, SRS (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.