A negative knee-jerk reaction to yesterday morning's employment data caused stocks to slide lower on the open, but the resilient bulls reversed the initial weakness shortly thereafter. The S&P 500 and Dow Jones Industrial Average ground higher throughout the day before finishing with gains of 0.4% and 0.3% respectively. Continued weakness in large-cap tech stocks weighed on the Nasdaq Composite, which closed lower by less than 0.1%. All the main stock market indexes finished near their intraday highs.

Turnover in the NYSE was 7% greater than the previous day's level, while volume in the Nasdaq eased 4%. The higher volume gains in the S&P and Dow were positive, as it hinted at institutional accumulation. However, the continued relative weakness of the Nasdaq was a bit concerning. Google (GOOG), for example, fell 2.3%. The internet giant has shed 4.8% in the past two days. Nevertheless, just as it appears a main stock market index may be running out of steam, industry sector rotation keeps the broad-based rally alive.

In yesterday's commentary, we pointed out the pullback setup in PowerShares U.S. Dollar Bull Index (UUP). After pulling back to close at support of its 20-day exponential moving average (EMA) the previous day, UUP followed through to the upside with a gap above its three-day high. Now, drilling down to the shorter-term hourly chart, one sees that a rally above yesterday's high should confirm the resumption of the developing uptrend. As such, we plan to buy UUP today, if it moves above yesterday's high. The daily chart below shows the nice bounce off the 20-day EMA, while the hourly chart that follows marks the short-term downtrend line we're monitoring:





In the January 4 issue of The Wagner Daily, we pointed out the bullish setup in iShares South Korea Index (EWY), which was poised for a breakout above a key area of horizontal price resistance. As anticipated, EWY subsequently moved above that resistance level, zooming to a new 52-week high. However, because its opening gap on the breakout day was so large, the reward/risk of an intraday trade entry was lessened, and we decided to pass on entering the trade. Since then, EWY has pulled back to near the low of its January 4 breakout bar, and we're again monitoring its price action for potential buy entry. As shown on the daily chart below, the breakout level should now act as support, and presents a low-risk entry point:



Another international ETF we're stalking for possible buy entry is iShares Australia Index (EWA). On the daily chart below, notice EWA has been consolidating in a range for the past several months, and is now poised to resume its dominant uptrend that began with the March 2009 lows. A rally above its January 6 high (above $24) will represent a breakout above the shorter-term "dirty" downtrend line of EWA. A "dirty" trendline occurs when the price action of just one or two days goes beyond the boundary of an otherwise perfect trendline. This is illustrated on the daily chart below:



Despite four straight days of gains in the S&P 500, the broad market has been largely apathetic since the new year began. The Nasdaq has been showing relative weakness, and the majority of the gains in the rest of the major indices were merely the result of the first hour of trading on the first business day of 2010. This week's price to volume patterns in the broad market have also given mixed signals. Overall, the uptrend clearly continues to favor the bulls, and there's simply no reason to fight it. Still, most of the strongest ETFs have become a bit extended, and need to pull back to near-term support levels in order to present attractive reward-risk ratios for new long entry. When we see these ETFs with the most relative strength start pulling back, we'll be sure to point out the most ideal trade setups to subscribers. In the meantime, we remain positioned with S&P Select Energy SPDR (XLE), one of the strongest sector ETFs this week.

Open ETF positions:

Long - XLE
Short (including inversely correlated "short ETFs") - (none)

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.