Bouncing back from its recent decline and four straight days of losses, the stock market surged higher yesterday, enabling the S&P and Nasdaq to reclaim their 50-day moving averages. The session was virtually a mirror image of the previous day's action, as the major indices opened higher, then trended steadily north throughout the entire day. The Nasdaq Composite rallied 1.8%, the Dow Jones Industrial Average 2.1%, and the S&P 500 2.3%. The small-cap Russell 2000 jumped 2.4% and the S&P Midcap 400 gained 2.2%, but both indexes only recovered about two-thirds of Wednesday's losses, and also remained below their 50-day lines. Whereas all the main stock market indexes tumbled to close at their intraday lows on Wednesday, each zoomed to finish near its best level of the day in yesterday's session.
It's positive that stocks were able to erase most to all of the previous day's decline, but one crucial element lacking from the rally was higher volume. Total volume in the NYSE declined 14%, while volume in the Nasdaq receded 16%. Turnover in the Nasdaq even finished slightly below its 50-day average level. If higher volume would have accompanied yesterday's gains, the broad-based rally would have been much more convincing. However, the significantly slower pace of trading tells us institutions were nervous and not convinced about aggressively buying shares. Since more than half of the stock market's average daily volume is the result of institutional trading, this is an important observation. When a market makes a large percentage move in one direction, then follows with an equally large move in the opposite direction, a look "under the hood" at volume patterns and market internals is a legitimate way to determine whether the bulls or bears had the upper hand. In this case, we have to say the bears still have the upper hand this week. As mentioned in yesterday's commentary, it may be dangerous to start buying back into the market until we see a solid "accumulation day," backed by institutional rotation back into the market.
In the October 27 issue of The Wagner Daily, we pointed out the potentially bullish developments taking place on the daily and weekly charts of the U.S. Dollar Bull Index (UUP). Now, three days later, UUP has broken out and pulled back, providing for an ideal entry point on the long side. The setup is illustrated on the daily chart of UUP below:
The most important element of the chart above is that UUP just broke out above resistance of a six-month downtrend line AND did so on a strong volume surge.
