Following up on the previous afternoon's bullish reversal attempt, stocks registered another round of gains yesterday, but a second consecutive session of lighter volume failed to confirm the advance. After overcoming initial weakness on the open, stocks trended higher into mid-day, then consolidated in a tight, sideways range throughout the rest of the day. The S&P 500 and Nasdaq Composite scored matching gains of 0.8%. The Dow Jones Industrial Average rose just 0.2%. Small and mid-caps snapped back from the previous day's relative weakness. The Russell 2000 and S&P Midcap 400 indices climbed 1.4% and 1.3% respectively. The S&P and Nasdaq closed near their highs of the day, but the laggard Dow finished just above the middle of its intraday range.

Total volume in the NYSE receded 11%, while volume in the Nasdaq was 2% lower than the previous day's level. Turnover in the NYSE remained above its 50-day average level, but trading in the Nasdaq was lighter than average. Considering the rather substantial, high-volume decline of April 16, it certainly would have been better if higher volume accompanied yesterday's rally, but institutions apparently remained on the sidelines. Nevertheless, market breadth was much better yesterday. In both the NYSE and Nasdaq, advancing volume exceeded declining volume by a margin of approximately 4 to 1. The performance of leading stocks, a reliable indicator of the broad market's health, was much better yesterday as well.

In the April 16 issue of The Wagner Daily, we pointed out the bullish consolidation in iShares Nasdaq Biotech Index (IBB). That day, as the S&P 500 tumbled 1.6%, IBB showed relative strength by dipping only 0.5%. Fast forwarding several days later, IBB is still holding firmly above support of its 20-day exponential moving average, oscillating in a narrow, horizontal range. As such, the bullish setup remains valid, and we continue to monitor IBB for potential buy entry on a rally above the high of its multi-week range. An updated snapshot of its daily chart is shown below:



In yesterday's commentary, we said recent market action has prompted us to shift into "SOH mode" (sitting on hands). With the main stock market indexes rallying on declining volume, as they still trade below resistance of their recent highs, this remains the case going into today. This means we intend to primarily sit on the sidelines for now, positioned largely in cash. Still, if IBB shows enough relative strength that it manages to break out, we may still buy it, albeit with reduced size and a tighter than usual stop. One thing we specifically like about this setup, compared to other potential continuation breakout plays right now, is that IBB has already been consolidating in a tight range for about one month. Many other setups, conversely, have much shorter bases of consolidation, if any.

Yesterday, after the close of trading, tech titan Apple Inc (AAPL) announced their latest quarterly earnings results. In keeping with the pattern of the past several quarters, they outperformed estimates by a wide margin, causing the stock to rally sharply higher in after-hours trading. This initially had the effect of sending the Nasdaq futures nearly 1% higher last night, but less than stellar earnings pre-market reports from other key companies, such as United Technologies (UTX), are apparently causing earlier strength in the futures markets to fade. Such overnight volatility and indecision is commonplace during earnings season. When combined with the current situation of investors and traders still trying to assess the true effect of last Friday's Goldman Sachs news, the environment seems pretty ripe for continued high volatility. Stay alert out there. Above all, remember to trade what you see, not what you think!

Open ETF positions:

Long - (none)
Short (including inversely correlated "short ETFs") - FAZ (half position)

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.