Stocks closed modestly higher on Thursday as volume fell to end the holiday-shortened week. The markets gapped up at the open and spent the remainder of the day consolidating near session highs. All five major indices closed in the black, with the Nasdaq, S&P MidCap 400 and small-cap Russell 2000 all posting 0.6% gains on the day. The S&P 500 rose by 0.5% while the Dow Jones Industrial Average tacked on 0.4% to end an impressive week for the market.

Market internals were mixed on Thursday. Volume dropped on the NYSE by 20% and on the Nasdaq by 9.3%. The advancing to declining volume ratio ended the day at 1.7 to 1 on the NYSE and 2.1 to 1 on the Nasdaq. The mixed market internals could be expected prior to the Easter weekend. Given Wednesday's massive follow through day for the market, yesterday's session could reasonably be characterized as a consolidation day for stocks.

On Thursday we sent an intraday alert that we were entering a long position in KOL. We liked the price and volume action in this ETF and the fact that it was exhibiting relative strength to the market. KOL closed at the highs of the session. Trade details are available to our subscribing members in the open positions section of the newsletter.



The Utilities Select Sector SPDR ETF (XLU) has been consolidating for the past three weeks and is now poised to move to higher territory. We see two potential entry triggers for this ETF. With the recent bullish muscle exerted by the market XLU could trigger a buy entry with a move above the three week high of $32.27 (Scenario 1). An alternative and our preferred setup would be for XLU to fill its recently formed gap and undercut the 20-day and/or 50-day moving averages (Scenario 2). This type of price action tends to shake out weak hands and attract short selling which in turn provides fuel for the potential breakout. We are not married to Scenario 2 but we do believe that this type of technical setup generally offers more upside potential.



Although a bullish signal triggered with last week's breakout move in the market, we still remain cautious in the current trading environment. Our caution is supported by the fact that five out of ten investor sentiment indices that we follow are at their highest bullish levels ever. Further, the other five are within 8% of their all time bullish highs. In order for big reversals to occur in the market, the trade must become "loaded". In other words, a vast number of traders must be betting in one direction for a small movement in price to cause a big change in market direction. This is true for both bullish and bearish reversals. Nonetheless, these indicators are leading indicators and tend to trigger weeks to months in advance of potential market moves. Due to these extreme readings we are carefully managing position size and exposure to the market. We will also look to book profits and cut losses quickly as volatility could enter the market with little warning.

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.