Stocks rallied for a third consecutive day on Friday, but managed to post only modest gains on the day. An early morning gap up and subsequent rally was met by selling pressure at the 11:00 am reversal period, and the indices remained in a tight trading range for the remainder of the day. For a change, the S&P 500 and the Dow Jones Industrial Average exhibited more strength than the mid and small-cap indices. Both the Dow and S&P closed 0.5% higher, while the S&P Mid-Cap 400, the Small-Cap Russell 2000, and Nasdaq Composite each rose only 0.3% on the day. Significant relative weakness in the chip sector was largely responsible for the divergence; the Philadelphia Semiconductor Index ($SOX) fell 1.4%, benefiting our position in ProShares Semiconductor UltraShort (SSG).

Across the board, volume declined on the day. Nasdaq volume was 1% lighter than the previous day's level, while turnover in the NYSE eased 9.2%. Market internals were mixed. Despite the tight trading range, advancing volume outpaced declining volume on the NYSE by approximately 2 to 1. The internals did not bode so well on the Nasdaq, where the ratio of advancing to declining volume was negative 1 to 1.

The iShares Nasdaq Biotechnology Index Fund (IBB) appears to be forming a distinct inverse "head and shoulders" pattern. The left shoulder low was set on June 8, the head on July 1, and the right shoulder on August the 25. On Friday, it broke above the 200-period simple moving average on increasing volume. A volume-fueled move above the neckline high of $84.81 would confirm the pattern. The predicted rally, measured from the bottom of the head to the neckline, would suggest an advance to near the March 24 high of $93.53.



After consolidating in a tight range for the past three days, on stronger than average volume, iShares MSCI Thailand Index Fund (THD) may be poised to continue its strong uptrend. A break above the three-day high on increasing volume would trigger a short-term buy signal for this ETF. However, be aware this is a more aggressive play than usual because THD is presently trading well above its 20-day exponential moving average:



Another Asian play to consider is the Vanguard Pacific Fund (VPL), which has been showing relative strength to the market, is trading above the 200-day simple moving average, and is retesting the highs of August 9. Friday brought a significant increase in volume, relative to the market. Further, VPL has been engaged in a sequence of higher highs and higher lows, dating back to early June. A push above $52.70, with supporting volume, suggests a buy signal for this ETF:



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.