Gapping sharply higher on the open, the main stock market indexes briefly kicked off the second quarter of the year above their sideways ranges and at fresh 52-week highs, but the initial buying enthusiasm quickly faded. Traders began selling into strength less than an hour after the open, causing stocks to reverse and drift lower throughout the afternoon. A wave of buying in the final hour of trading enabled the major indices to finish in positive territory, but it was still a shaky day overall. The S&P 500 rose 0.7% and the Dow Jones Industrial Average advanced 0.6%. The Nasdaq Composite, off 0.5% at its intraday low, eked out a closing gain of 0.2%. The small-cap Russell 2000 and S&P Midcap 400 indices climbed 0.8% and 0.9% respectively. Finishing near the middle of their intraday trading ranges, the main stock market indexes formed "doji star" candlestick patterns, indicative of confusion at their highs. Nevertheless, all the major indices registered another (shortened) week of gains.

Total volume in the NYSE eased 20% ahead of the holiday weekend, while volume in the Nasdaq ticked 1% higher. Considering the indecisive nature of the broad market last Thursday, slower trade in the NYSE was positive. However, the Nasdaq barely dodged the label of a bearish "distribution day." A closer look at the intraday volume pattern shows turnover in the Nasdaq picked up as the index was selling off, then receded as the index recovered into the close. That's the opposite of a healthy intraday volume pattern. Still, instances of institutional selling in recent weeks have been sparse.

Although the major indices finished at or near their 52-week highs last week, the main stock market indexes have not yet broken out above their sideways trading ranges of the past several weeks. Instead, they continue to consolidate in choppy, sideways ranges, "correcting by time." But even though bullish momentum has temporarily slowed down, the broad market has not yet exhibited any significant signs of an impending correction. As such, we'll be monitoring the major indices closely this week, in anticipation of convincing breakouts to new 52-week highs. Of the broad-based ETFs, iShares S&P MIdcap SPDR (MDY) may show the most relative strength in the event of a breakout. Mid-caps showed the most leadership during the market's last leg up, and that may become the case again:



On the chart above, notice the clearly defined breakout level of MDY. Short-term momentum traders may find a buying opportunity in a breakout above that resistance level. However, a tight stop is recommended, just below the breakout level, to protect against the rather decent possibility of a failed breakout to new highs.

Most industry sector ETFs showed a lack of conviction last week. It was difficult to find any interesting patterns, as many ETFs just moved sideways. However, notable relative strength and bullish momentum was found in the international ETFs. Specifically, emerging markets ETFs moved well, outperforming the gains of our domestic markets by a wide margin. The iShares Xinhua China 25 Index (FXI), which we bought in The Wagner Daily on March 26, zoomed 8% higher for the week. Last Thursday alone, FXI rallied 2.8%. Although the Chinese ETFs were showing relative weakness to the U.S. markets for about five months, the cycle seems to have definitively changed. Now, Chinese ETFs are clearly showing relative strength again, and we're positioned to take advantage of it:



It wasn't only China that took off last week. Emerging Markets ETFs such as Russia (RSX), South Africa (EZA), and South Korea (EWY) all zoomed to fresh 52-week highs. One of the more interesting, but lesser known, breakouts in the emerging markets was in the Wisdom Tree Emerging Markets High-Yielding Equity Index (DEM). The unique, yield-focused portfolio has enabled DEM to break out to a new 52-week high ahead of other popular, diversified emerging markets ETFs such as iShares Emerging Markets Index (EEM). Since the prior resistance level should now act as support, a pullback to the area of last Thursday's breakout level in DEM may be worthy of consideration:



Within the domestic markets, we anticipate a resumption of relative strength in the financial sector when/if the major indices break out. As per our most recent commentary, we bought iShares U.S. Broker-Dealers Index (IAI) when it gapped up on April 1. Crude Oil and Energy ETFs rallied sharply last week, and we may see follow-through this week as well, but we generally prefer buying that sector on a pullback, rather than a breakout. Finally, iShares Silver Trust (SLV) is perking up, and we may take a closer look at that ETF within the next several days.

Open ETF positions:

Long - FXI, UUP, IAI
Short (including inversely correlated "short ETFs") - TBT, BRF

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.