Giving traders a case of whiplash over the past few days, the stock market jumped higher yesterday, erasing the previous day's substantial losses and then some. The major indices gapped up on the open, continued higher through the first ninety minutes of trading, then consolidated in a sideways range for the rest of the day. The Nasdaq Composite climbed 2.7%, the S&P 500 2.3%, and the Dow Jones Industrial Average 2.0%. Small caps kicked into high gear, enabling the Russell 2000 to zoom 3.7% higher. The S&P Midcap 400 rose 2.9%. A bit of selling ahead of the closing bell prevented the main stock market indexes from finishing at their best levels of the day, but they still closed around the upper third of their intraday ranges.

Total volume in both the NYSE and Nasdaq was roughly on par with the previous day's levels. Though yesterday's session technically did not qualify as an "accumulation day," it's positive that the gains did not occur on lighter volume. There has been a mix of higher volume gains and higher volume losses over the past week, so the market's recent price to volume relationship has not decisively indicated the actions of institutional trading. However, market internals were quite strong yesterday. In both exchanges, advancing volume trounced declining volume by a margin of 9 to 1. This tells us the buying was broad-based amongst various industry sectors, a necessary element in healthy rallies.

Several large tech companies have reported their latest quarterly earnings over the past week, causing the price of Semiconductor HOLDR (SMH) to be choppy. However, despite the near-term indecision, SMH continues to exhibit relative strength to other industry sector ETFs, as well as the broad market. Motoring 3.1% higher yesterday, SMH outperformed the Nasdaq, and the ETF is now poised to break out above resistance of its July 14 "swing high." If it does, the move would correlate to a breakout above its prior highs from June as well. The daily chart is shown below:



With an unrealized gain of 2.5% since our July 16 entry into SMH, we are already positioned to take advantage of further upside in the ETF. Traders who missed our initial pullback buy entry might alternatively consider buying a breakout above the range, but be aware that breakouts in the current environment have a higher chance of failure than in a bull market. Patiently waiting for a pullback entry after spotting the early relative strength in SMH substantially increased our odds of a profitable outcome. If SMH breaks out above resistance, we'll raise our stop higher, in order to remove the risk from the trade.

For both the bulls and bears, broad market action of the past week has been akin to navigating through a landmine field. Sharp opening gaps in both directions, combined with swift intraday reversals, have made it challenging to comfortably hold most short-term positions overnight. Fortunately, most of the five positions in our model portfolio are specialty ETFs, which usually have a low correlation to the direction of the stock market. SMH is the exception, but its relative strength and our relatively low entry price prevented the position from moving very far against us each time the major indices dropped.

If we had to choose whether the bulls or bears are winning the tug of war right now (only in the near-term), we would favor the bulls. With a relatively equal mix of higher volume gains and higher volume losses over the past week, it's fair to say the price to volume relationship of the broad market, typically an important leading indicator of trend, is inconclusive at this time. However, the bullish reversal day of July 20, combined with yesterday's impressive rally that followed a very weak close the previous day, recent price action itself has been resilient. Furthermore, the S&P 500, Nasdaq Composite, and Dow Industrials all finally closed above resistance of their 50-day moving averages yesterday. Although they briefly did so last week as well, the indices are now above their 50-day moving averages by a more convincing margin. Perhaps most importantly, yesterday's rally also enabled all three indexes to break out above resistance of their multi-month downtrend lines that began with the April 2010 highs. Below, this is shown on the daily chart of the S&P 500 SPDR (SPY), a popular ETF proxy for the benchmark S&P 500 Index:



Near-term sentiment is certainly improving, as indicated by yesterday's technical breaks of resistance in the major indices. Leading individual stocks are also starting to break out. Nevertheless, it would be quite a stretch to say we now have an "all clear" signal to start aggressively buying stocks and ETFs. The 200-day moving averages are still overhead, and they move prove to be more formidable resistance than the 50-day moving averages. Additionally, resistance of the June highs must be overcome before declaring a reversal of the broad market's intermediate-term downtrend. For now, the best plan of action may be to selectively start buying ETFs with relative strength, such as SMH. Quite simply, any ETF already trading at or near its June high could be deemed to have near-term relative strength. Such ETFs would likely lead the broad market in case of further upside, and would probably hold up the best when the market pulls back. Assuming the market holds up from here, more potential buy setups should start coming onto our radar screen, and we'll be sure to bring them to your attention in next week's commentary.

Open ETF positions:

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

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.