Stocks tacked on strong gains for a third consecutive day, but finished off session highs as a wave of selling hit the market into the close. All five major indices closed in the black with higher beta issues leading the advance. The small-cap Russell 2000 posted a 1.8% gain, while the Nasdaq and the S&P MidCap 400 added 1.6% and 1.5% respectively. The S&P 500 moved higher by 1.4% and the Dow Jones tacked on 1.3%.

Wednesday's action was also driven by positive market internals. For the first time during this three-day rally, volume was higher on both exchanges. Volume on the Nasdaq surged by 20.1% while trade on the NYSE finished only fractionally higher. However, advancing volume topped declining volume by a solid margin of 5.7 to 1 on the NYSE and 4.5 to 1 on the Nasdaq. The strong volume on the Nasdaq points directly to institutional accumulation. Yet, the verdict is not as clear for the NYSE as volume increased by less than 1%. At a minimum, it is safe to consider yesterday an accumulation day for the Nasdaq.

Yesterday, on a massive spike in volume, the Market Vectors Indonesia ETF (IDX) gapped below critical support of its 200-day MA and closed near session lows. IDX now offers a shorting opportunity into resistance of the 200-day MA. We are monitoring this ETF closely for a potential short entry trigger.



Since forming a reversal candle on September 12, the iShares MSCI Mexico Investable Market ETF (EWW) has only been able to rally a mere 1.4% while the broad market has rallied over double that amount. Further, EWW remains well below its 20-day EMA. A move back into resistance of the 20-day EMA could offer a shorting opportunity in this ETF.



Despite three days of rallying, the outstanding short interest in the market continues to remain high. High levels of bearishness are not generally conducive for big selloffs in the market. As such, we may see further upside action before the market potentially makes another leg lower. For the moment, a short squeeze appears to be looming. Still, the intermediate-term downtrends remain intact.

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.