Equities moved higher for a second consecutive day but closed well off session highs. In a followup to Monday's action, stock prices whipsawed again but Tuesday's session ended with stocks in retreat. All five major indices closed higher as smaller cap issues led the advance. The S&P MidCap 400 tacked on 2.2% while the small-cap Russell 2000 gained 1.9%. The Dow Jones Industrial Average, Nasdaq and S&P 500 posted gains of 1.3%, 1.2% and 1.1% respectively.

Market internals flashed a bullish signal but we are wary to classify yesterday's action as an accumulation day for the broad market due to the significant intraday reversal. Volume was up across the board with the Nasdaq seeing an increase in turnover of 5.7%. On the NYSE, trade jumped by an impressive 31.3%. Advancing volume topped declining volume by a ratio of 3.8 to 1 on the NYSE and 3.5 to 1 on the Nasdaq.

We were stopped out of our position in SRS yesterday resulting in our first losing trade of the month. As discussed in yesterday's newsletter we considered this trade as slightly higher risk and we therefore took small position size and maintained a tight stop. However, given the reversal candle formed by SRS yesterday, this ETF now presents a possible long entry above yesterday's high of $16.45. We are monitoring this setup carefully for a possible re-entry.



Yesterday the ProShares Short MSCI EAFE ETF (EFZ) gapped down and undercut its 20-day EMA before reversing to close near the day's high. This type of price action serves to sweep poorly placed stops and shake out weak hands. A move back above yesterday's high of $54.48 could provide a short entry trigger for this ETF. We are placing EFZ on the watchlist. Trade details are available to our subscribers in the watchlist section of the newsletter.



For the second time in as many days market leaders struggled suggesting that the most recent two-day rally is being led by market laggards. This type of price action must be taken into consideration when evaluating the bearishness or bullishness of a market. In a healthy market stocks such as AAPL, GMCR and AMZN would have rallied to new highs on a day like yesterday.

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.