Building on the previous session's bullish intraday reversal, stocks zoomed higher yesterday, but the rally lacked the power of institutional buying. After gapping higher on the open, traders and investors initially sold into strength, causing the major indices to surrender initial gains. However, the bulls returned after the first hour of trading, lifting the markets higher into mid-day. Thereafter, the main stock market indexes consolidated in a very tight, sideways range throughout the afternoon, before ticking to new intraday highs in the final minutes of trading. The S&P 500 climbed 1.8%, the Dow Jones Industrial Average 1.7%, and the Nasdaq Composite 1.4%. The small-cap Russell 2000 and S&P Midcap 400 indices jumped 1.7% and 1.6% respectively. Each of the major indices settled at its best level of the day.

On the surface, yesterday's session may have appeared to be quite strong, but a look "under the hood" reveals a different situation. Despite impressive gains, one fly in the ointment is that volume is both exchanges receded sharply, indicating an unwillingness for mutual funds, hedge funds, and other institutions to support the rally. Total volume in the NYSE declined 17%, while volume in the Nasdaq was 9% lighter than the previous day's level. In both exchanges, turnover also limped in below 50-day average levels. With institutions primarily remaining on the sidelines, despite such solid percentage gains, there was definitely a lack of volume confirmation to yesterday's rally. Light volume rallies can be dangerous because it only takes one swift day of higher volume selling to undo the gains of a lower volume rally.

Traders who have been waiting for a buyable pullback in the U.S. Dollar Bull Index (UUP) may want to watch for an entry over the next few days. Yesterday, UUP broke below its very short-term 10-day moving average, and is now just above its 20-day exponential moving average (EMA). Since UUP has not even touched its 20-day EMA since gapping higher on January 20, the first touch of that moving average on a pullback provides a low-risk entry point for traders who missed the initial breakout. With a steady intermediate-term uptrend now established, short-term pullbacks are buyable. The daily chart of UUP is shown below:



As you might have noticed, the stock market's strength of the past two days coincided with a retracement in UUP as well. As long as the correction in UUP continues, it may be beneficial to the overall stock market. However, when UUP stabilizes on this pullback, and resumes its dominant uptrend, the strength of UUP is likely to once again weigh on the S&P, Nasdaq, and Dow. A resumption of strength in the dollar could be a confirming indicator for selling long positions and/or entering new short trades.

While on the subject of currencies, the daily chart of CurrencyShares Japanese Yen (FXY) is forming a tight, nicely-formed "bull flag" pattern that may provide traders with a nice pop. Conveniently, support of the 50-day moving average is also just below yesterday's low, as is support of the lower channel of its short-term uptrend from the January 2010 low. We're planning to buy FXY on a rally above yesterday's high. Regular subscribers should note our detailed trigger, stop, and target prices under "Today's Watchlist.: The setup is annotated on the chart of FXY below:



In the February 10 issue of The Wagner Daily, we illustrated the short-term, upside price targets for the S&P 500 SPDR (SPY) and Dow Jones DIAMONDS (DIA) if the bounce off the February 5 lows held up. Specifically, we said, "The immediate upside target would be a quick rally to the prior 'swing highs' from February 2 (circled in pink). Upon running into those highs, one might consider selling any long positions into strength, and taking a 'wait and see' approach to the stock market's next move." Now, one week later, DIA has rallied to that short-term price target, and SPY is within easy striking distance of following suit. Furthermore, both SPY and DIA closed exactly at their 50% Fibonacci retracements from their January highs to February lows. This is shown on the daily charts below:





In yesterday's commentary, we said the bullish intraday price action of February 12 would likely carry stocks higher in the very near-term. Based on yesterday's rally, that's exactly what is happening so far. However, the main stock market indexes have already moved to levels that now force savvy traders to question the reward-risk ratio of new long entries at current levels. With resistance of their early February "swing highs," the 50% Fibonacci retracements, and even the 50-day moving averages just overhead, it's going to take a lot more power, in the form of higher volume, for stocks to blast through all those levels. While there may be additional upside in the coming days, such as a rally to the 61.8% Fibonacci retracement levels, it's a negative reward-risk ratio to buy when the potential losses are greater than the likely upside gains in the near-term. If anything, a test of the 61.8% Fibonacci retracements and 50-day moving averages may provide ideal short entry points for the near-term.

If you're already long any positions you've snagged from lower levels, it certainly makes sense to ride out the bullishness while it lasts. Still, it would be prudent to use tight trailing stops to protect gains and eliminate the risk of a sudden reversal lower. Because of the anticipated brevity of the rally into major resistance levels, we did not grab any new long positions over the past few days. Instead, we feel it's a better reward-risk ratio to wait for weak ETFs to rally into key resistance levels, then initiate new short positions. If/when the broad market starts to run out of gas on this bounce, it's realistic to consider the major indices will fall back down to test support of their February 5 swing lows. However, if stocks indeed "undercut" their February 5 lows, it would be a great, low-risk level to close all short positions and jump back to the long side of the market.

Open ETF positions:

Long - 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.