A broad-based rally on higher volume yesterday enabled the major indices to reclaim a chunk of last week's losses, but a bit of late day weakness caused stocks to give back a significant portion of their intraday gains. The Nasdaq Composite gained 1.3%, the S&P 500 Index 1.2%, and the Dow Jones Industrial Average 1.0%. Small and mid-cap stocks showed relative strength again, as the small-cap Russell 2000 Index jumped 1.8% and the S&P Midcap 400 Index similarly rose 1.7%. Despite the market's solid gains, selling pressure in the final hour of trading lead to the main stock market indexes closing only near the middle of their respective intraday trading ranges.

Perhaps the most positive aspect of yesterday's session was the higher volume that accompanied the broad market's gains. Total volume in the NYSE rose 25% above the previous day's level, while volume in the Nasdaq increased 7%. The higher volume gains across the board caused both the NYSE and Nasdaq to register a bullish "accumulation day," indicative of buying amongst mutual funds, hedge funds, and other institutions. Nevertheless, although it was the first "accumulation day" in three weeks, turnover in both exchanges still remained below 50-day average levels. In both the NYSE and Nasdaq, advancing volume exceeded declining volume by a ratio of more than 4 to 1.

Over the past month, we've noted the relative strength and bullish chart patterns of select international ETFs, primarily those in emerging markets. Recently, we've also been discussing the strength of fixed income (bond) ETFs. If combining those two areas, it would be logical to assume a bond ETF focused on emerging markets would be the best of both worlds. Indeed it would be, and iShares Emerging Markets Bond Fund (EMB) has been one of the strongest trending ETFs since the beginning of July. The daily chart of EMB is shown below:



One common indicator of short-term strength is the frequency at which stocks and ETFs pull back to touch support of their 20-day exponential moving averages within the course of their uptrends. With the broad market engaged in choppy and indecisive conditions in recent weeks, very few ETFs have been trending steadily higher without at least correcting to or "undercutting" their 20-day EMAs. However, notice that EMB is trending so strongly that it has not even retraced down to its 20-day EMA since its eight-week uptrend began. This ETF has been on our radar screen for weeks, as we have been waiting for a potential entry point on the pullback. Obviously, that hasn't happened yet, but we will definitely be looking for an entry point on the first significant correction. Specifically, we'd like to see a pullback to and a one-day undercut of the 20-day EMA. As discussed in my book, Trading ETFs: Gaining An Edge With Technical Analysis, the first pullback to touch its 20-day EMA of a strongly trending ETF typically presents an ideal, low risk entry point, in anticipation of resumption of the dominant uptrend. We will continue monitoring this ETF in the background, and will alert subscribers of any potential entry points that develop on a correction.

Yesterday's rally enabled the benchmark S&P 500 Index to move back above its 50-day moving average. However, resistance of its 20-day exponential moving average is near yesterday's high. More importantly, the index must still contend with resistance of its 200-day moving average, about 2% above its current price. Moreover, yesterday's rally technically had little effect on the situation in the Nasdaq Composite, as the index was unable to reclaim its 50-day moving average. Take a look:



The strength of yesterday's session was encouraging, but it would be quite a stretch to say the market has resumed its previous bullishness. Yesterday's late-day weakness that caused stocks to give back much of their intraday gains was not a good sign, and the major indices still must contend with a plethora of overhead resistance levels and moving averages. What the market really needs in order to convincingly demonstrate momentum is the punch of strong, institutional buying. Generally, we would like to see turnover at least exceed average levels on the market's next accumulation day. As mentioned yesterday, we don't really expect this to happen until at least after the Labor Day holiday, after the summer doldrums have passed.

Open ETF positions:

Long - TLT, DBA, UUP
Short (including inversely correlated "short ETFs") - DZZ

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.