For the second consecutive day stocks closed at the highs but trade was mixed. All five major indices saw sizable gains with the Russell 2000 leading the way. By the closing bell the small-cap index had tacked on an impressive 4.2%. The S&P MidCap 400`and the Nasdaq added 3.6% and 3.0% respectively. The S&P 500 climed 2.9% while the Dow Jones Industrial Average improved by 2.5%.

Wednesday's action was driven by mixed internals. Volume rose a modest 2.9% on the Nasdaq but dropped a noteworthy 17.4% on the NYSE. However, advancing volume overpowered declining volume on both exchanges. By the closing bell the spread ratio stood at an impressive 18.8 to 1 on the Big Board and 15.4 to 1 on the Nasdaq. The uptick in volume and the higher advancing combined to create an accumulation day for the Nasdaq. The significantly lighter volume on the NYSE points to a lack of institutional involvement on this index.

In Wednesday's newsletter we discussed the bullish action in the ProShares UltraShort Euro ETF (EUO) stating that we may be witnessing a trend reversal. Yesterday this ETF pulled back and it appears likely that it might fill the gap created on September 6. We are placing EUO on the watchlist. Trade details are available to our subscribers in the watchlist segment of the newsletter.

During the last market downturn the iShares MSCI Japan Index ETF (EWJ) showed significant relative weakness as it undercut a critical support level $9.40. Further, EWJ is one of the few ETFs that is still significantly removed from its 20-day EMA. Should EWJ find its way back near the 20-day EMA this could provide a possible shorting opportunity for this ETF. We are monitoring EWJ closely as a potential short candidate.



The markets continue to exhibit significant volatility. As we have stated many times before, volatility is generally a bearish signal. Sharp reversals and rapid advances like we have seen over the past two sessions are generally unsustainable. Although the current advance may have further upside potential, at a minimum we would not be surprised to see some selling pressure enter the market tomorrow.

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.