Roaring back from Monday's decline, stocks surged sharply higher yesterday, enabling several of the major indices to breakout above key resistance levels. The broad market opened in firmly positive territory, then entered into a steady uptrend that persisted throughout the entire day. The Nasdaq Composite jumped 2.4%, the S&P 500 Index 2.1%, and the Dow Jones Industrial Average 1.8%. Small caps led the pack, as the Russell 2000 index zoomed 2.9% higher. The S&P MidCap 400 advanced 2.1%. Each of the main stock market indexes closed near their best levels of the day.

Yesterday's rally was confirmed by substantially higher volume, allowing both the S&P and Nasdaq to score a bullish "accumulation day." Total volume in the NYSE soared 31% above the previous day's level, while volume in the Nasdaq swelled 15%. In both exchanges, turnover moved back above 50-day average levels. It's encouraging for the bulls that yesterday's advance was backed by buying amongst mutual funds, hedge funds, and other institutions. Market breadth was also extremely positive, indicating the rally was broad-based, rather than driven by just a few industry sectors. In the NYSE, advancing volume trounced declining volume by a margin of nearly 15 to 1. The Nasdaq adv/dec volume ratio was quite solid at 7 to 1.

Obviously, an overwhelming majority of ETFs moved higher yesterday, but we're primarly focused on ETF's now breaking out of consolidation patterns, or resuming their uptrends after a pullback. One such ETF is iShares Nasdaq Biotechnology Index (IBB), which is poised to make another leg higher in the near-term. The daily chart below illustrates the bullish pattern:



We bought IBB on September 20 in The Wagner Daily, after it confirmed the breakout above resistance of its August 2010 high (blue horizontal line). That breakout above the August high also correlated to a move above the neckline of an inverse "head and shoulders" pattern on its daily chart. One of the most basic tenets of technical analysis is that a prior level of resistance becomes the new level of support, after the resistance is broken. As such, we knew the breakout above the August high should act as firm support on a pullback.

On October 4, IBB pulled back alongside of the broad market, but came into near-term support of its 20-day exponential moving average (beige dashed line). More substantial support of the August breakout level, as well as the 200-day moving average, rested just below the 20-day EMA. Yesterday (October 5), buyers stepped back into IBB, enabling the ETF to cruise back to the high of its recent range. But perhaps most importantly, yesterday's volume in IBB was nearly 300% the average daily level. This tells institutions were accumulating the ETF, after noting how well positioned IBB was on a technical level. Although we are already long IBB, traders who missed our initial entry might still consider a secondary buy entry near the current price. With IBB only closing at the top of its consolidation yesterday, the price is not extended, especially if it pulls back even slightly in today's session.

Yesterday's broad-based advance caused the S&P 500, Dow Jones, and Nasdaq Composite to move above their September closing highs, which is above the highs of the multiweek consolidation patterns. The Nasdaq 100 Index still remains within its consolidation pattern, but just one day of moderate gains would allow it to join the other three indicies at new recent highs. Without a doubt, yesterday's rally was quite strong, and backed by bullish market internals. Arguing with the market, regardless of whether or not one thinks such price action is justified, is usually a losing proposition.

Since yesterday's rally corresponded with significant technical breakout levels in the major indices, there is a good possibility stocks will now start working on another leg higher. Nevertheless, it's imperative to see proper follow-through within the next several days. Furthermore, bear in mind the major indices still remain well below their highs of the year. Only a move above those highs would cause the broad market to enter into a new, dominant uptrend.

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.