October began with a modest morning gap up, that was immediately met by a strong wave of selling. Ultimately, all of the major indices closed up on the day, but there was both time and price divergence among them. By 10:30 am both the Dow Jones Industrial Average and S&P 500 found their footing, and managed to rally the remainder of the day. On the other hand, the Small-Cap Russell 2000, S&P MidCap 400 and the Nasdaq Composite, were unable to establish a bottom until the 11:30 reversal period. Despite the delayed price reversal, the Russell 2000 managed the biggest gain on the day by finishing up 0.5%. The Dow Jones Industrials and the S&P 500 were not far behind, as each posted 0.4% gains on Friday. Finally, the MidCap S&P 400 and the Nasdaq were the laggards on the day. The MidCap 400 realized a paltry 0.2% rise and the Nasdaq almost closed the day flat, as it managed a 0.1% increase. Overall, the markets lacked conviction and as a result, gains were modest.

Trading volume was significantly down on Friday. Day over day, NYSE volume dropped about 8.0%, while Nasdaq volume plunged 20%. The low volume rally kept the DJIA, S&P 500 and Nasdaq contained within the tight, 5-day trading range. Despite the lack of turnover, advancing volume outpaced declining volume by a ratio of 4.6 to 1 on the NYSE, while the ratio on the Nasdaq was slightly positive at 1.1 to 1. Friday's internals suggest a lack of any significant participation by large institutions. But, the recent "price consolidation" suggests a continuation of the current uptrend.

Market Vectors Brazil Small Cap (BRF) provides an excellent example of tight consolidation preceding a "breakout" to new highs. From September 13 through September 30 this ETF traded within a $1.75 range. Consolidation is quite important in the life cycle of a trend. As markets rally, consolidation serves as a "breather", from which a base is built to fuel the new highs. Notice the impressive increase in volume in BRF on September 10 and September 11. Another volume "spike" occurred on September 29 and 30. On Friday, as overall market volume decreased, the volume in BRF increased by 5%. Even though the volume on the day was not spectacular, the stage was set for the breakout based on the preceding two weeks volume and price action. BRF closed near the highs of the day, further supporting a sustainable rally. Potential purchase points for BRF would be a pullback into the area of consolidation or a breakout above the current level after several days of consolidation.





The PowerShares DB Agricultural Fund (DBA) may be in the midst of a trend reversal. On Thursday, DBA breached the 20-day EMA, but then managed to bounce back and close near the highs of the session. But, on Friday, the explosion in volume precipitated a major selloff in DBA, and it closed near the lows of the day. This massive volume spike and resulting price action, suggests that more than just a pull back may be at hand. Friday's price move was the largest intraday dollar change since the rally began in early June. On the daily chart, DBA shattered the 20-day EMA, but did manage to find support near the 50-day Moving Average. The 50-day MA also coincides with the uptrend line drawn through the June 7, June 29 and July 7 lows. A light volume rally back into the 20-day EMA could provide a good shorting opportunity. A more conservative approach would be to wait for DBA to set a lower high and a lower low. But, due to Friday's massive explosion in volume, a rally on light volume back into the 20-day EMA, likely provides a lower risk entry than is typical for this setup.








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.