Scoring its best single-day gain in months, the broad market rocketed higher yesterday, but several of the main stock market indexes settled near key price resistance levels. Stocks opened higher, rallied throughout the morning, then consolidated in a tight, sideways range for the rest of the day. The S&P 500 and Nasdaq Composite logged identical gains of 3.0%, while the Dow Jones Industrial Average climbed 2.5%. The small-cap Russell 2000 and S&P Midcap 400 indices jumped 3.8% and 3.4% respectively. All the major indices closed near their best levels of the day.

Total volume in the NYSE eased 16%, but turnover in the Nasdaq increased 2% over the previous day's level. The higher volume gain in the Nasdaq enabled the index to register a bullish "accumulation day," indicative of institutional buying. However, it was disappointing that higher volume failed to accompany the gains in the S&P and Dow as well. In both the NYSE and Nasdaq, advancing volume destroyed declining volume by more than 20 to 1. Such strong market internals hint that yesterday's rally may have largely been driven by short covering, rather than an abundance of fresh buying interest.

In the September 1 issue of The Wagner Daily, we said, "Of the various types of ETFs on the market, select international ETFs were among the top performers in August. Several ETFs in this group showed significant relative strength by either consolidating in a sideways range, near their highs, or even trending higher, while the domestic markets sold off." We then pointed out the bullish setups in iShares Turkey Index (TUR) and Market Vectors Indonesia (IDX), the former of which triggered our buy entry yesterday.

After writing about the relative strength a handful of international ETFs exhibited during the August selloff in the U.S. markets, we got to thinking about a possibly greater, long-term implication of last month's bullish divergence in those ETFs. First of all, all the leading international ETFs at new highs are so-called "emerging markets" (Turkey, Indonesia, Thailand, Chile, etc.), rather than "developed markets." What we found most interesting about last month's impressive peformance of these ETFs was their ability to completely ignore the weakness in the U.S. markets.

In years past, emerging markets ETFs, traditionally considered to be "high risk," typically outperformed the U.S. markets in uptrends, but also fell harder than the U.S. markets during corrective phases. However, if recent price action of emerging markets ETFs is any indication, we may be witnessing a very fundamental shift in the concept of what an "emerging market" really is. Most "emerging market" ETFs are countries that now have substantially less debt, greater economic growth, and more profitable companies than Western countries. Our humble opinion is this may be the case for many years to come. If so, emerging markets ETFs may become the preferred area to shift funds into when the U.S. and other Western markets are in decline. Quite a paradigm shift in thought process, isn't it? One thing is for certain -- a plethora of international ETFs now reside on our baseline watchlist, and the strongest ones will become attractive buy entries when they eventually have significant pullbacks to support.

In yesterday's commentary, we said of the August 31 market action in the domestic markets that "a higher volume session with flat price action near the lows of a downtrend is often bullish, as it shows prices are refusing to go lower, despite the abundance of supply." In this case, Tuesday's flat price action with higher volume, near the lows of a range, indeed preceded yesterday's solid rally. For the bulls who have been yearning for a decent bounce, yesterday's session was encouraging. But the big question is whether the bounce will develop into a substantial, new uptrend, or if the bullish momentum will swiftly fade, as has been the case with other rally attempts in recent months.

Unfortunately for traders, yesterday's sharp rally has merely pushed the main stock market indexes back into "no man's land," near the middle of their four-month, sideways trading ranges. Furthermore, both the S&P 500 and Dow Jones Industrials closed right at resistance of their 50-day moving averages yesterday. This is annotated on the daily chart of the S&P 500 SPDR (SPY), a popular ETF proxy for the benchmark S&P 500 Index:



While momentum from yesterday's rally will likely be enough to push the indexes back above their 50-day MAs, the S&P and Dow will still need to contend with more significant resistance of their 200-day MAs at higher levels, as well as horizontal price resistance of the multi-month, sideways range. Until the market proves otherwise, one must assume the intermediate-term, sideways range will continue to be in effect. As such, the best plan of action is to trade in the direction of the market's short-term momentum, while maintaining a shorter than usual time horizon on all trades. This is certainly not the time to be greedy with winning trades, as there is not yet an ounce of technical proof that the choppy, sideways range will finish anytime soon.

Open ETF positions:

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

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.