After opening near the flat line, stocks traded in a narrow, sideways range ahead of the afternoon Fed announcement on interest rates and economic policy. Upon receiving the anticipated news that rates are expected to remain "exceptionally low for an extended period," the major indices rallied modestly higher, albeit with the usual post-Fed volatility along the way. The Nasdaq Composite rose 0.8%, the S&P 500 0.5%, and the Dow Jones Industrial Average 0.4%. Small and mid-caps showed an unusual divergence between each other. The Russell 2000 gained 1.0%, but the S&P Midcap 400 edged only 0.2% higher. Each of the major indices settled near its intraday high.

Total volume in the NYSE increased 15% above the previous day's level, while volume in the Nasdaq was 4% greater. The gains on higher volume technically caused both the S&P and Nasdaq to register a bullish "accumulation day," but the faster pace of trading was largely attributed to yesterday being a Fed day. Nevertheless, it was the first positive price to volume relationship the market has exhibited since the current correction began. Another session of more substantial gains on increased turnover would be more convincing. We'll continue to closely monitor the stock market's price to volume relationship in the coming days, in order to determine whether or not a short-term bottom may be forming.

Yesterday afternoon, we sold our position in UltraShort Emerging Markets (EEV) near its intraday high, locking in a handsome gain of nearly 18% since our January 15 entry. Though we initially had expectations of EEV rallying to test its prior highs from late October/early November of 2009, we made a judgment call to close the trade because the inversely correlated ETF has cruised steadily higher over the past two weeks, without a significant period of consolidation or pullback. Although EEV could still make another leg higher in the intermediate-term, it could first undergo a significant short-term pullback if the broad market bounces from short-term oversold conditions. Still, prior resistance of the 50-day MA could now act as support. As such, a pullback to that level in the near-term, in sync with a bounce in the broad market, could provide an ideal re-entry point to take advantage of the next round of weakness in the domestic markets. The daily chart of EEV is shown below:



In our January 25 commentary, we pointed out the bullish consolidation in the U.S. Dollar Bull Index (UUP). Yesterday, after the Fed announcement, UUP rallied above the high of that consolidation, enabling it to finish at its highest level of the past five months. Because of that breakout above resistance, one could expect continued strength in UUP over the next few weeks. We're now showing a decent profit on our long position in UUP, and will soon trail the stop tighter, to protect against the possibility of a failed breakout. Here's a snapshot of the daily chart:



After taking profit on our EEV position yesterday, we sent an Intraday Trade Alert to subscribers, informing them of a new trade entry into another international ETF. This time, however, it was a bullish entry into a first-world region -- iShares Japan Index (EWJ). We've mentioned EWJ a few times over the past month, as the ETF has started to show relative strength. Over the past week, EWJ has pulled back from its recent highs, and has now come into support of its prior highs from last month. As such, we bought EWJ on the "undercut" of its 20-day exponential moving average. The setup is shown on the daily chart below:



Since international ETFs often have a lot of opening gaps, it's most beneficial to use the weekly chart in order to see the "big picture" and remove the noise from the daily chart. Upon doing so, we see EWJ broke out above resistance of its long-term downtrend line last month. Then, in the first half of this month, it resumed the developing uptrend to make another leg higher, before pulling back to support of its December breakout this week. Take a look:



It's still way too early to start getting aggressive on the long side of the market. However, a short-term bounce in the domestic markets is probable, and we like that EWJ has a relatively low correlation to the direction of the U.S. markets. The pullback entry into EWJ makes for an attractive reward-risk ratio, as the 50-day moving average is just 10 cents below yesterday's lows. If the broad market rallies for a few days, but stalls shortly thereafter, we'll probably just take whatever profit can be had in EWJ. But in the event heavy volume accumulation suddenly comes back into the markets, we're now ideally positioned in a strong ETF that could shoot to new 52-week highs.

Open ETF positions:

Long - EWJ, FCG, UUP
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.