After two days of consolidation, stocks broke through resistance on Friday. Although the rally was not spectacular, it did complete a bullish week that pushed the broad markets to close at the highest levels since May of this year. The small cap Russell 2000 led all major indices by closing up by 1.4%. The Nasdaq Composite and the S&P MidCap 400 realized gains of 0.8% and 0.7% respectively. The S&P 500 posted a 0.6% gain and the Dow Jones Industrial Average finished in the green by 0.5%. The best performing sectors were the Materials and Energy sectors, up 1.97%and 1.25% respectively. The Financial Sector continued to lag the market as it could only manage a modest 0.3% on the day. As a proxy for the woes among financials, the Select Sector SPDR Financial Trust (XLF) has remained unable to break above the 200-day simple moving average.

Despite the fact that the broad markets reached new highs on Friday, turnover was relatively weak. On the NYSE, volume rose by a mere 1.5%, day over day, while the Nasdaq posted an increase of 8.9% on Friday. As might be expected, the light volume impacted the advancing volume to declining volume ratios. On the NYSE up volume outpaced down volume by a 3 to 1 ratio. The number on the Nasdaq was even less impressive, as advancing volume/declining volume was only 2 to 1. Although positive, Friday's internals were not strong enough to suggest major institutional involvement. Nonetheless, as technical traders, we never look to fight the trend.

As demonstrated in the chart below, the $DJI, $SPX and the $COMP appear poised to test the highs established in late April of this year. This conclusion is supported by the fact that each index has "rallied above the neckline" of what appear to be inverse head and shoulders patterns. As we've discussed in the past, once the neckline is penetrated, the projected rally for a head and shoulders pattern is the distance measured from the tip of the head to the neckline. This analysis suggests that the DJIA, S&P 500 and the Nasdaq Composite will find resistance at 11,258, 1220 and 2535 respectively. It is significant that all three are moving in unison. Broad market convergence suggests that the bulls are in control and the inverse head and shoulders patterns should "follow through" as suggested.





The PowerShares WilderHill Clean Energy Portfolio (PBW) rocketed about its 200-day simple moving average on September the 29. This move was accompanied by a huge spike in volume. Since the volume fueled breakout, PBW has been consolidating in a tight range, in a pennant-like formation. During this seven-day consolidation volume has been declining. Further, the 20-day exponential moving average has crossed above the 200-day simple moving average. Combined, these factors suggest that PBW should continue to rally. A move above the October 1 high ($10.00) on increasing volume, would trigger a buying opportunity for this ETF. Above ten dollars, the next resistance for PBW is around $10.52. Although this is not an official call, we will be monitoring PBW as a Watch List candidate.





Although we remain bullish, we are cautious that this rally may be getting overextended. Several leading indicators we follow suggest the same. The recent headlines provide a great example of why we strictly adhere to our "technical" trading philosophy. Overall, the news has been fairly negative but the market continues to rally. By using a strict set of rules and technical indicators, we are able to avoid the "noise of the news" that can easily conflict with sound trading practices.

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.