After a morning gap up, U.S. stocks sold off briskly until 10:00 am, at which point the market staged a big intraday reversal, to close near the highs of the day on Friday. The markets managed to rally in the face of concerns about economic growth, voiced by Fed Chairman Ben Bernanke, and a revenue warning by Intel. The Dow Jones Industrial Average, S&P 500 and Nasdaq each rose by about 1.7% on the day. The S&P 400 mid-cap managed a more robust 2.2% gain, while the small-cap Russell 2000 led all indices by posting an impressive 2.8% rally. Despite Friday's big rally, the major averages ended the week lower.

A jump in volume helped power the advance. Nasdaq volume increased 18.0%, while NYSE volume rose 9.0%. Friday's advance was confirmed by strong market internals. Advancing volume beat declining volume by 10 to 1 on the NYSE and 7 to 1 on the Nasdaq. Overall, it was a bullish move for the market, although we remain in a trading range.

Following up on Friday's analysis, our existing long position in the PowerShares DB Agriculture Fund (DBA) took another step toward resuming its advance, by rallying above the three-day high and into the downtrend line discussed in Friday's newsletter. A break above the seven-day high (around 26.42) provides further confirmation of this move (see comparison of charts below).







The SPDRs S&P 500 (SPY) is potentially setting up as a shorting opportunity. A rally into the downtrending 20-day exponential and 50-day simple moving averages, at this moment, represents a good target for a short entry (108.5 to 109 area). These averages also coincide with the 50% Fibo retracement level measured from the August 8 high to the August 25 low. Interestingly, all of the major indices are showing a similar technical pattern.




The iShares MSCI Italy Index (EWI) has demonstrated significant relative weakness to the S&P since the beginning of 2010. Year to date it has underperformed the S&P by about 18%. On Friday, EWI rallied on insignificant volume as compared to the S&P. The S&P's volume closed near the 50-day volume moving average. By comparison, EWI rallied on volume that was less than half of its 50-day volume moving average. Our anticipated entry point would be a move into the 20 and 50-day MAs (near $15.50).




Open ETF positions:

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

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.