Following through on the previous day's accumulation, stocks scored a solid round of gains yesterday. The major indices opened sharply higher, trended north throughout most of the day, then pulled back in the final two hours of trading. By day's end, the broad market had closed slightly higher than its opening price, but well into positive territory. The Nasdaq Composite climbed 1.5%, as the Dow Jones Industrial Average and the S&P 500 both gained 1.2%. The small-cap Russell 2000 and S&P Midcap 400 indices advanced 1.7% and 1.5% respectively. All the main stock market indexes finished around the upper quarter of their intraday ranges.

Turnover was mixed. Total volume in the NYSE eased 15%, but trading in the Nasdaq was 7% greater than the previous day's level. The higher volume gain in the Nasdaq enabled the index to score its second straight "accumulation day." However, volume in the Nasdaq was still slightly below its 50-day average level. In both exchanges, market internals were solid. In the NYSE and Nasdaq, advancing volume exceeded declining volume by a margin of approximately 4 to 1.

On its daily chart, the Semiconductor HOLDR (SMH) has been stuck in a very choppy trading range over the past four months. However, a look at the longer-term weekly chart smoothes out the noise, and reflects a consolidation that has the potential of significant upside if it follows through on a breakout. The weekly chart of SMH is shown below:



The dashed horizontal line marks the significant area of horizontal price resistance that has been in place since August of this year. If SMH rallies above that level, over the $26.50 area, it has the potential to make another leg up this time around. But if buying SMH on a breakout above that level, one might consider a relatively tight stop, just below the breakout level, because of the high chance of another false breakout.

Yesterday, iShares Nasdaq Biotech (IBB), which we pointed out as a buy setup in yesterday's newsletter, broke out above resistance of its 50-day MA and 5-month downtrend line. As per our plan, we bought IBB on the breakout. Although it closed with an unrealized gain, we'll be watching for confirmation of the breakout, which would come on a move above the "swing high" from mid-November. This is shown on the daily chart of IBB below:



The Japanese Nikkei Index finally woke up, causing iShares Japanese Index Fund (EWJ) to surge 4% higher yesterday. Trading in the international ETF also jumped to three times its average daily level, pointing to accumulation amongst mutual funds, hedge funds, and other institutions. EWJ has also broken out above resistance of its 3-month downtrend line. Though it formerly was showing relative weakness to the U.S. markets, we may be seeing the early signs of institutional rotation into EWJ. We'll be monitoring its price action for potential buy entry, for a "swing trade," on a pullback to the area of its 20-period exponential moving average on the hourly chart (20-EMA/60 min). The sudden breakout in EWJ is shown below:



In yesterday's commentary, we pointed out a potential short setup in Oil Service HOLDR (OIH), which had recently broken support of its 50-day moving average and 5-month uptrend line. Along with nearly everything else, OIH moved higher yesterday, but the ETF ran into resistance of its 50-day moving average and prior uptrend line, causing it to stall and close near its low of the day. As such, OIH now provides an attractive reward-risk ratio for potential short entry below yesterday's low. The setup is illustrated on the daily chart below:



Despite yesterday's solid gains in the broad market, the S&P 500 remains stuck in the trading range discussed in yesterday's commentary. In the S&P 500, the high of yesterday's session was just one point shy of the upper channel resistance of its three-week range, but the index ran into a bit of selling pressure as it approached that level. Because of the trading range condition, we must now be prepared for the possibility of a few down days that take the index down towards lower channel support, at the 1,083 area. Of course, a convincing gap above the high of the range, on today's open, could quickly make history of the recent range-bound channel. But unless that happens, it's good to stay alert and not get complacent on the long side of the market.

Open ETF positions:

Long - IBB, FCG
Short (including inversely correlated "short ETFs") - RKH

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.