Stocks concluded the first week of 2010 with a round of solid gains, as the major indices logged another advance last Friday. Despite an initial, unenthusiastic reaction to a pre-market employment report, the ever-ready bulls showed up in the final thirty minutes of trading, reversing earlier losses into modest closing gains. Tech stocks were back in action, enabling the Nasdaq Composite to rise 0.7%. The S&P 500 and Dow Jones Industrial Average edged higher by 0.3% and 0.1% respectively. The small-cap Russell 2000 gained 0.4% and the S&P Midcap 400 climbed 0.6%. All the main stock market indexes finished at their highs of the day and week.

Volume eased across the board, indicating last Friday's gains lacked the backing of institutional support. Total volume in the NYSE receded 17%, while volume in the Nasdaq was 5% lighter than the previous day's level. Turnover in the NYSE also fell back below average levels. Nevertheless, it was the first week in five weeks that the S&P and Nasdaq registered higher volume gains.

The iShares Real Estate Index (IYR), an ETF that showed relative strength throughout most of December, pulled back to short-term support of its 20-day exponential moving average (EMA) last week. This has created a potential "swing trade" opportunity on the long side. On the daily chart below, notice IYR probed below its 20-day EMA on an intraday basis, several days last week, but managed to close above that level of short-term support each time:



On the shorter-term hourly chart interval, a downtrend line has developed from the December 28 high, which is anchored with the high of January 7. As such, a breakout above that downtrend line, which is just above last Friday's high, would be a valid buy entry for the current pullback. However, it may be advisable to look for a little more price confirmation by first waiting for IYR to move above its January 7 high ($46.52), rather than only the January 8 high ($46.23). Furthermore, if IYR gaps up, it may be wise to keep a very tight stop, just below the low of the first 20 minutes, in order to guard against a fakeout move. If IYR is going to resume its uptrend from here, the healthiest action would be an opening gap higher that doesn't look back.

In our January 8 commentary, we said, "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." Going into today, this continues to be our overall thoughts; for example, we're now focused primarily on buying strong ETFs that pull back (such as IYR).

Valuable experience over the past ten years has taught us the dangers of getting caught up in the frenzy and chasing new entries on runaway breakouts in stocks and ETFs. Still, because an "overbought" market can continue to become even more "overbought" before it eventually corrects, traders with existing long positions that are performing well should simply consider the use of trailing stops to maximize gains, rather than trying to pick a top. We used a rather tight trailing stop to lock in a small gain on our SMH position last week, but only because the sector had started to show relative weakness. But since the energy sector is still demonstrating clear relative strength, we're giving the XLE stop a little more "wiggle room" for now, in order to let the winner run.

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.