Gapping lower on the open, stocks got off to a rough start yesterday morning, but the broad market grinded its way higher throughout the day, causing the main stock market indexes to finish near the flat line and with mixed results. The Dow Jones Industrial Average ($DJIA) edged 0.1% higher, the S&P 500 Index ($SPX) slipped 0.1%, and the Nasdaq Composite dipped 0.2%. The small-cap Russell 2000 and S&P MidCap 400 indices declined 0.5% and 0.7% respectively. All the major indices finished near their intraday highs, as the bulls demonstrated their resilience.

Total volume in the NYSE ticked 4% higher, while volume in the Nasdaq was 2% lighter than the previous day's level. Market internals were negative, but only moderately so. In the NYSE, declining volume exceeded advancing volume by a ratio of 2 to 1. The Nasdaq ADV/DEC volume ratio was negative by less than 3 to 2. Although turnover in the NYSE rose slightly, volume was still below its 50-day average level. This tells us banks, mutual funds, hedge funds, and other institutions were not in sell mode yesterday.

In yesterday's Wagner Daily stock and ETF trading newsletter, we pointed out the potential trade setup in iShares Emerging Markets Index ($EEM). Although listed on our watchlist, the trade did not hit our trigger price for buy entry. However, yesterday's price action in EEM now makes our reward to risk ratio even more favorable for buy entry because the ETF gapped lower on the open, then reversed to close at its intraday high. This resulted in the formation of a bullish reversal candlestick, which is shown on the daily chart below:



Looking at the weekly chart again, notice that yesterday's pullback also caused EEM to come into new support of its prior downtrend line from the 2011 high. One of the most basic tenets of technical analysis is that a prior level of resistance becomes the new level of support, after the resistance is broken. Therefore, the prior downtrend line shown on the weekly chart below should provide substantial support for EEM:



When a stock or ETF is forming a bull flag chart pattern and then gaps down sharply, it has the effect of washing out the "weak hands" who sell a position that shows the first hint of trouble. This is positive because it absorbs overhead supply from traders who would otherwise be selling into the next move up. The end result is that it makes it easier for the stock or ETF to move higher when the buyers step back in. Then, traders who sold at the lows feel regret, which causes them to buy at a higher level, thereby adding to the bullish momentum. The other benefit of a stock that gaps down, but closes with a bullish reversal candlestick, is that it makes it easier for us to clearly define our stop price just below the low of the reversal bar. For these reasons, we now like the EEM trade even better. Subscribers should notice on the ETF Trading Watchlist above that we have adjusted both the trigger and stop prices for the EEM swing trade setup.

We also mentioned in yesterday's newsletter that several other international ETFs were starting to look good. One of those is iShares Philippines ($EPHE), which just broke out to a new all-time high and has pulled back to new support of its breakout level. In addition to EEM, we have added EPHE to our watchlist for potential buy entry today. The weekly chart pattern of EPHE is shown below:



One other international ETF we are monitoring is iShares Mexico ($EWW). It is not an "official" trade setup for entry yet, but it is definitely on our radar screen as a potential breakout candidate. The long-term monthly chart of EWW is shown below:



The other ETF that was on our watchlist yesterday, Elements Intl. Agriculture ($RJA), did not yet trigger for buy entry, but remains on our watchlist going into today. Note the slightly adjusted trigger price. If it does not trigger, or at least form a bullish reversal bar, in today's session, we will probably remove it from our watchlist on Monday.

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.