A rough start turned into an encouraging finish yesterday, as stocks reversed early losses to finish at their best levels of the week. The benchmark S&P 500 Index, down 0.8% within the first thirty minutes of trading, trended higher at mid-day to close with a 1.0% gain. The Nasdaq Composite climbed 1.4% and the Dow Jones Industrial Average advanced 1.1%. The small-cap Russell 2000 and S&P Midcap 400 indices rallied 1.6% and 1.4% respectively. All the major indices settled near their best levels of the day.

Turnover rose slightly, helping to confirm the gains. Total volume in the NYSE increased 6%, while volume in the Nasdaq was 4% higher than the previous day's level. Technically, both the S&P and Nasdaq notched a bullish "accumulation day," indicative of institutional buying. However, it was not so hot that turnover in both exchanges remained below 50-day average levels. Market internals were solid. In the NYSE, advancing volume exceeded declining volume by nearly 4 to 1. The Nasdaq adv/dec volume ratio was positive by a ratio of 5 to 1.

In yesterday's commentary, we analyzed the daily charts of the broad market, and pointed out key levels of support and resistance that would likely determine the direction of stocks in the very near-term. Specifically, we discussed the back-to-back "doji star" candlestick formations of the broad-based ETFs and said, "A rally above the February 9 highs could help the main stock market indexes reclaim a direction for more than an hour or two, and resistance of the February 2 highs would be the next short-term target. Conversely, the intraday lows of the past two days have become just as important levels of support." So, did yesterday's rally have any technical significance? Yes, but not overly so. The Nasdaq Composite cruised above its February 9 high by a convincing margin, but the S&P and Dow did not. On the three daily charts below, notice how the S&P and Dow finished right at their intraday highs of February 9. The Nasdaq moved above its high, but now must contend with its 20-day exponential moving average just overhead:







More negative news out of Europe this morning is weighing on the euro, which has tumbled 11% since late November 2009. Over the past few days, the euro was attempting to put in a short-term bottom from its February 5 lows, but pre-market weakness has caused the euro to slice through its February 5 low as of several hours before the open. The precipitous plunge of the multi-national currency is shown on the daily chart of the euro/usd below:



The persistent decline in the euro has obviously benefited the U.S. dollar, which is now in a firm intermediate-term uptrend. The U.S. Dollar Bull Index (UUP), which we have been long for the past month, continues to march steadily higher, and is now forming a "bull flag" on its daily chart, shown below:



Since gapping higher on January 20, the very short-term 10-day moving average (the dotted line) has been providing support. On February 9, for example, UUP gapped down to kiss its 10-day MA, but hustled right back up the next day. When stocks and ETFs are in extremely strong trends, they often will only retrace to their 10-day, rather than 20-day, moving averages before resuming their dominant trends. Although we're now sitting on a large unrealized gain with the UUP position, we remain long the full position because the price action has given us no reason to sell. One of the most basic tenets of profitable trading is to let the winners ride, while cutting the losses quickly. This, of course, is what we're doing with UUP. Nevertheless, we'll continue to trail stop higher, to lock in profits along the way, but we're keeping the stop loose enough to give the required "wiggle room" to sit through normal pullbacks.

Aside from the actual play in UUP, another reason to keep a close eye on the euro is that it has recently started weighing on the direction of the U.S. markets as well. The February 5 low in the euro coincided with the recent "swing low" in the main stock market indexes, and the pre-market weakness in the euro is hurting the S&P and Nasdaq futures this morning as well. With a little more than two hours until the opening bell, both futures markets are indicated to open approximately 0.7% lower, a retracement of the majority of yesterday's gains. While it's beneficial the Nasdaq closed above resistance of its February 9 high, and the S&P and Dow closed right at their February 9 highs, it would only require another round of higher volume selling to quickly send the major indices back to test their February 5 lows, especially since yesterday's volume was not very strong. The market is starting to look better in the near-term, but a rather healthy dose of caution is still required on the long side. Honor your stops, and don't be complacent at this pivotal level in the markets.

NOTE: On Monday, February 15, the U.S. markets will be closed in honor of Presidents Day. As such, The Wagner Daily will not be published that day, but regular publication will resume the following day. Enjoy the long weekend.

Open ETF positions:

Long - UUP
Short (including inversely correlated "short ETFs") - SRS

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.