An indecisive day of trading finished on a positive note yesterday, as the major indices built on the previous day's gains. Stocks gapped higher on the open, drifted down to modest losses by mid-day, then reversed back towards their morning highs in the afternoon. Blue chips showed a bit of relative strength, as the Dow Jones Industrial Average rose 1.2%. The S&P 500 gained 0.9% and the Nasdaq Composite advanced 0.7%. The small-cap Russell 2000 and S&P Midcap 400 Indices climbed 1.4% and 1.1% respectively. Showing late-day buying interest for the second day in a row, all the major indices settled near their intraday highs.

As with the previous day's rally, the advance lacked the confirmation of higher turnover. Total volume in the NYSE eased 13%, while volume in the Nasdaq was 5% lighter than Wednesday's level. Although the main stock market indexes have registered gains in each of the past three sessions, volume in all three sessions was below 50-day average levels. In order for the bounce off the recent lows to be meaningful and sustainable, institutional accumulation will soon need to return to the scene. Otherwise, any rally attempt is likely to be short-lived. When fledgling recoveries lack the confirmation of higher volume, just one day of higher volume losses can easily erase several days of gains.

In the July 6 issue of The Wagner Daily, we pointed out the bullish setup in PowerShares Agriculture Fund (DBA), an ETF comprised of a basket of agricultural commodities futures contracts. That day, we explained the rationale behind our June 30 buy entry, and said, "Our entry into DBA was a classic example of buying an 'undercut,' a setup that occurs when a stock or ETF briefly drops below an obvious level of support, shaking out the 'weak hands,' then snaps right back a day or two later. When this happens, traders and investors who quickly sold at the first hint of trouble are forced to jump back in, or else miss the move. Since the overhead supply has been absorbed by the previous selling action, this leads to further upside momentum. As such, we bought DBA at a price of $24.07, when it rallied back above its June 29 high and 50-day MA. Since then, it has been consolidating in a tight, sideways range, near its June 30 high. In the coming days, we anticipate a breakout above resistance of its three-month downtrend line, which would help confirm a reversal of the intermediate-term trend." Fast forwarding a few days later, DBA has broken out above resistance as anticipated, and is now poised to make another leg higher in the near to intermediate-term. If you missed our initial entry into DBA, a low-risk, secondary buy point would be a pullback to support of the breakout, around the $24.35 level. An updated daily chart of DBA is shown below:



Many fixed-income (bond) ETFs are now pulling back from their recent highs, providing low-risk buy entry points for traders. So far, the pullback has been slow and steady, and the uptrend lines and moving averages are acting firmly as support. As such, one must assume the dominant uptrend will resume in the coming days. We're already long iShares 20+ Year T-Bond (TLT), which also paid a nice dividend of 31 cents per share on July 1. The daily chart of TLT is shown below:



Yesterday was an active day for us, as several changes to our model ETF portfolio were made. When Market Vectors Gold Miners (GDX) gapped higher on the open, but immediately started selling off, we sold short a half position. We've been stalking GDX for short entry over the past week, but did not enter with full size yesterday because we did not get the entry price of $50.75 we were looking for. Still, we'll continue monitoring its price action for possibly adding additional shares. GDX subsequently showed weakness throughout the entire day, and is now showing a small unrealized gain. We also entered a new short position in iShares Real Estate Index (IYR), when it gapped higher on yesterday's open. We recently pointed out that UltraShort Real Estate ProShares (SRS) was reversing, but we sold short IYR on the bounce, rather than buying the inversely correlated SRS on a pullback. Another change was the addition of 25% more shares to our existing, winning DBA position, when it rallied above the previous day's high. Finally, we stopped out of U.S. Natural Gas Fund (UNG), when it broke down below its 50-day MA yesterday. However, we made a judgment call to immediately re-enter the trade, as we suspected a "stop hunt" on the "undercut" of the 50-day MA. We are now trailing a relatively tight stop just below yesterday's low. Regular subscribers to The Wagner Daily received real-time notification of all these portfolio changes yesterday.

Open ETF positions:

Long - DBA, TLT, UNG, UUP
Short (including inversely correlated "short ETFs") - GDX, IYR

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.