A scary start turned into an encouraging finish yesterday, as stocks clawed their way back from sharp morning losses to finish only slightly lower. The major indices gapped down nearly 2% on the open, drifted in a narrow, sideways range through mid-day, then impressively marched higher in the final two hours of trading. By the closing bell, the Nasdaq Composite had slipped just 0.1%. The S&P 500 lost 0.2% and the Dow Jones Industrial Average declined 0.5%. The small-cap Russell 2000 was unchanged, as the S&P Midcap 400 eked out a gain of 0.1%. Each of the main stock market indexes settled at its intraday high.

Total volume in the NYSE swelled 14%, while volume in the Nasdaq rose 7% above the previous day's level. Although the major indices closed in negative territory, the higher volume was more indicative of institutional accumulation than distribution. That's because turnover was tracking only a few percent higher until the late afternoon rally began, at which point volume started ticking higher alongside of prices. Furthermore, it's positive that stocks finished at their best levels of the day. Mutual funds, hedge funds, and other institutions apparently saw yesterday morning's weakness as a buying opportunity. However, it's notable that volume in both exchanges barely exceeded 50-day average levels.

Over the past week, a limited number of ETFs have stealthily shown relative strength and have broken out, or are poised to do so, above key areas of price resistance. Creeping higher in recent weeks, the KBW Insurance SPDR (KIE) is one such example. Yesterday, when the major indices opened below their February 23 lows, KIE opened just above Tuesday's low. The subsequent rally in the broad market enabled KIE to close at the top of its recent range, which now positions the ETF to break out above a major band of horizontal price resistance on its weekly chart. Take a look:



If KIE rallies above the dashed horizontal line on the chart above, it will close at a fresh 52-week high. Bullish momentum from a breakout of such lengthy consolidation should send KIE on another leg up, establishing a new intermediate-term uptrend. To maintain a positive reward-risk ratio on the trade, one might consider a protective stop just 3 to 4% below the breakout level. This would protect against a failed breakout in an overall uncertain market environment.

Yesterday, the S&P Retail SPDR (XRT) broke out above the highs of a five-month band of consolidation, enabling the consumer-oriented ETF to close at its highest level of the past two years. Now that it has broken out, a slight retracement to the area of yesterday's breakout, around the $36.85 to $37 area, presents a low-risk buy entry. A protective stop could neatly be place just below the $36 level, as support of both the 20 and 50-day moving averages is in that vicinity. The daily chart of XRT is shown below:



Finally, keep an eye on iShares Nasdaq Biotech (IBB), which we first discussed as a potential breakout in our February 23 commentary. Throughout the market's intraday weakness of the past few days, IBB has held firm to its 20-day exponential moving average, and its recent consolidation is still valid. We continue to like IBB for buy entry on a rally above the $85.65 area. An updated snapshot of the setup is shown on the daily chart below:



In yesterday's The Wagner Daily, we said the major indices were "stuck between a rock and a hard place," which was support of the 20-day moving averages below and resistance of the 50-day moving averages overhead. Because of this pattern, we also said, "one should be prepared for high volatility in the coming days." Yesterday's large gap down and just as swift intraday reversal certainly confirmed our thoughts to be prepared for volatile price action. But even though yesterday's price and volume patterns were bullish, the major indices remain between their 20 and 50-day moving averages going into today's session. As such, stay alert and prepared for whippy or indecisive price action in today's session as well. Stocks will soon make up their mind, but it's important to focus on preserving capital until that happens.

Open ETF positions:

Long - (none)
Short (including inversely correlated "short ETFs") - PSQ, EEV

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.