After gapping higher on the open, stocks continued building on their initial gains through the first half of the day. By early afternoon, the major indices were trading nearly 1% higher, but selling pressure in the final ninety minutes of trading caused the broad market to surrender approximately half its intraday advance. Still, the S&P 500 gained 0.6%, the Nasdaq Composite 0.5%, and the Dow Jones Industrial Average 0.4%. The small-cap Russell 2000 and S&P Midcap 400 indices rose 0.7% and 0.8% respectively. The S&P and Dow settled near the middle of their intraday ranges. Showing a bit of relative weakness, the Nasdaq finished in the bottom third of its range.

Total volume in the NYSE was on par with the previous day's level, while volume in the Nasdaq ticked 4% higher. The slightly higher volume gain in the Nasdaq technically enabled the index to register its second straight "accumulation day." However, because the Nasdaq turned in a rather weak closing performance, institutional selling into strength probably played a part in the higher turnover as well. As such, we're more inclined to label yesterday's price to volume relationship in the Nasdaq as indicative of "churning." Market internals in both exchanges were positive, but finished near their worst levels of the day. In the NYSE, advancing volume exceeded declining volume by a ratio of 2 to 1. The Nasdaq adv/dec volume ratio was positive by just 3 to 2.

In the March 15 issue of The Wagner Daily, we said we were looking for a short-term bounce in the downtrending CurrencyShares Euro Trust (FXE), which would carry the ETF into key resistance of its 50-day moving average. If that occurred, we would consider a new, intermediate-term short position into FXE. Since then, FXE has been trading in a tight, sideways range, and has yet to rally into its 50-day MA. However, another currency ETF that may now be ready to resume its dominant trend is the U.S. Dollar Bull Index (UUP). The daily chart is shown below:



Last month, we closed a very profitable trade in UUP, which we bought after the January pullback to its 50-day MA, and sold into strength near its February high. Now, UUP has again pulled back to its 50-day MA, providing another buy entry point, in anticipation of a resumption of its four-month uptrend. Going into today's session, we plan to buy UUP on a rally above yesterday's high. Regular subscribers will see our detailed entry, stop, and target prices listed in "Today's Watchlist" below. With the stock market rather extended, but not yet in pullback mode, one benefit of trading UUP, and all currency ETFs, is the low correlation to the direction of the broad market.

Several ETFs that track the main stock market indexes formed bearish "shooting star" candlestick patterns yesterday. The pattern is most clearly seen on the daily chart of the Nasdaq 100 Index Tracking Stock (QQQQ), shown below:



The "shooting star" pattern is a bearish signal that often precedes a short-term top within an uptrend. However, in order for the pattern to be confirmed, the following day's candle should gap down to open below the previous day's low. Therefore, if QQQQ opens today's session below yesterday's low, and fails to immediately reverse higher within the first thirty minutes of trading, there is a significant chance the session will develop into a downtrending day. If the major indices gap down on today's open, and are unable to quickly reverse back into the previous day's range, short-term traders may find such action a compelling reason to take profits on any long positions in which they've been waiting to lock in gains. Conversely, if stocks open flat to lower, and subsequently attempt to reverse higher, traders might simply consider trailing their stop prices to just below today's opening lows.

Yesterday, we made two changes to our lightly positioned model ETF portfolio. When the afternoon selling pressure hit the market, we made a judgment call to sell our half position of KBW Capital Markets SPDR (KCE) into strength. The decision was based primarily on KCE running into resistance of its January 2010 high, rather than weakness in the broad market, but the combination of the two prompted us to lock in the gain. Shortly thereafter, we initiated a new short position in the S&P Metals and Mining SPDR (XME), which showed late-day relative weakness after running into resistance of its January high as well. Like QQQQ, XME also formed a bearish "shooting star" candlestick, but did so while still trading below its 52-week high. Unlike our recent long entries seeking to take advantage of the market's uptrend, XME was entered as a very short-term, counter-trend trade, with the intention of capturing profits on a pullback to support of its 50-day MA. If we fail to immediately see bearish follow-through in today's session, we will probably just scratch the trade, but a positive reward-risk ratio by having a stop above yesterday's high made XME a decent bet, especially if the broad market now starts to correct as well.

Open ETF positions:

Long - GDX
Short (including inversely correlated "short ETFs") - XME

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.