Stocks wrapped up a volatile week of trading on a positive note last Friday, as the major indices logged a solid round of gains and finished at new 52-week highs across the board. An early morning rally attempt stumbled into mid-day, but the bulls returned in the afternoon, enabling the main stock market indexes to rally to new intraday highs before the closing bell. The S&P 500 rose 0.7%, the Dow Jones Industrial Average 0.6%, and the S&P 500 0.4%. Small and mid-cap stocks showed leadership again, as was the case throughout the entire week. Both the Russell 2000 and S&P Midcap 400 indices gained 1.0%. Each of the major indices closed at its best level of the day, week, month, and year. For the week, the Nasdaq gained 2.0%, marking the eighth consecutive week of gains for the tech-heavy index. The Dow also scored its eighth straight weekly advance.

Although heavier upside volume started creeping back into the market the previous day, turnover eased in last Friday's session. Total volume in the NYSE was 7% lighter than the previous day's level, while volume in the Nasdaq eased 11%. Last week, the S&P 500 gained in four of the five days, but only one of the up days was on higher volume. Furthermore, the sole down day (which we labeled as "churning") was accompanied by higher volume. On the surface, recent price action remains constructive and is still favoring the bulls. But "under the hood," the sudden shift to a negative price to volume relationship in the market remains a yellow flag for astute investors and traders.

Last Friday, many Energy ETFs convincingly broke out above pivotal resistance levels to finish at fresh 52-week highs. Although the sector has showed relative weakness throughout much of this year, we may be seeing the start of a new cycle of institutional rotation back into the Energy ETFs; Oil Service HOLDR (OIH), ProShares Oil and Gas (DIG), and S&P Energy SPDR (XLE) are a few ETFs in the Energy sector that broke out last Friday. Since prior resistance becomes the new support level after the resistance is broken, a pullback to the breakout levels of these ETFs could now provide low-risk entry opportunities in the Energy sector. Below is a daily chart of XLE, a popular, diversified representation of the Energy sector. Regular subscribers should note our detailed trigger, stop, and target prices for this setup in the "Today's Watchlist" section below:



Traders looking for a short-term trend reversal play may want to keep an eye on U.S. Natural Gas Fund (UNG), a commodity ETF in the Energy industry. Perhaps the worst performing ETF in the entire stock market in recent years, UNG has been a real dog. However, every dog eventually has its day, and the daily chart of UNG is indicating that a near-term, tradeable bounce may be setting up for buy entry. Take a look:



Specifically, UNG has been trading in a tight, sideways consolidation for the past four weeks, and is now testing the upper channel resistance of that base. A solid rally above the high of the consolidation (marked by the dotted horizontal line) would also cause UNG to break out above its descending 50-day MA. This would reverse the short-term trend of UNG, and present momentum traders with a decent buying opportunity. Nevertheless, we must emphasize that the intermediate and long-term trends overwhelmingly remain down, and it's still too early to determine whether a break of resistance would only be a short-term trend reversal, or lead to something more substantial. If buying UNG, consider a tight initial stop, just below the breakout level, in order to protect against a failed breakout.

Given that the major indices have already recovered their April 16 losses and are back to trading at new highs, the bullish environment is apparently not over yet. However, towards the end of last week, we began seeing exhaustion patterns on quite a few individual stocks. Although we've been advocating a cautious, cash-heavy stance in recent days, one thing missing from the scenario that the market may be due for a substantial pullback was the lack of "blow off tops," a pattern that occurs when strongly uptrending stocks suddenly go parabolic, along with an accompanying spike in volume. This pattern occurs when everyone who hasn't been buying the market all along finally jumps in and starts buying. It is at THAT time when significant tops historically form. Still, such tops usually do not form overnight, as it takes time to finally suck all the "late to the party Charlies" into the market. In the event of a correction in the coming week, look for stocks to hold their "swing low" support levels of April 16, many of which converge with the 20-day exponential moving averages of the major indices.

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.