Driven by a strong earnings report from Apple Computer, stocks gapped firmly higher on yesterday's open, dipped to the flat line just before mid-day, then rallied back to the highs late in the afternoon. Once again, wide divergence between the Nasdaq and the other main stock market indexes was prevalent. The Nasdaq Composite cruised to a 1.7% gain, while the tech-heavy Nasdaq 100 Index leapt 2.2% higher. The S&P 500 and Dow Jones Industrial Average advanced 0.9% and 0.8% respectively. The small-cap Russell 2000 climbed 1.0% and the S&P Midcap 400 gained 0.7%. Like the previous day, all of the major indices closed at their intraday highs.

Total volume in the Nasdaq increased 15% over the previous day's level, confirming the presence of institutional buying in the tech arena, but turnover in the NYSE declined by 6%. The higher volume gains in the Nasdaq enabled the index to score a bullish "accumulation day," a positive sign considering the five recent "distribution days." Trading activity was less enthusiastic in the S&P and Dow. Despite the broad-based gains, market internals were not overly strong. In both exchanges, advancing volume exceeded declining volume by approximately 2 to 1. Most of the market's gains resulted from the opening gap up, as opposed to intraday uptrends.

Since breaking out above resistance of their intermediate-term downtrend lines last week, many of the fixed-income (bond) ETFs have been consolidating in a tight range, near their highs. We recently sold the iShares Corporate Bond (LQD) into strength, which netted a nice profit when considering the monthly dividend distributions. Now, we have our eyes on the iShares 20+ year Gov't Treasury Bond Fund (TLT). If it breaks out above the high of its three-day range, we plan to initiate a long position:



Again, remember that one of the biggest benefits of trading the fixed-income ETFs is their monthly dividend distributions. Though the volatility of the actual ETF is rather low, it's not that bad when considering substantial dividends are paid at the beginning of every month. If we buy TLT on the breakout, our target will be a new 52-week high, at which point we will trail a stop to lock in gains. Our stop will be below support of the recent range.

Though the Nasdaq has been showing relative strength ever since the August 18 broad market bottom, the bullish divergence in the index has really become apparent over the past two days. While the S&P 500 has recovered just over half of its large loss from the October 19 sell-off, the Nasdaq has already recovered all of that day's loss. This is in line with what we said in yesterday's Wagner Daily, which was "If the broad market manages to stabilize near current levels, expect the Nasdaq indices to be the first of the broad-based indexes to zoom back to new highs. If buying the market right now, the Nasdaq is clearly the place to be. . ." After closing below its 20-day EMA for only one day, while remaining firmly above its 50-day MA the whole time, the Nasdaq Composite is once again poised to break out to new highs:



Unlike the Nasdaq, both the S&P and Dow have a lot of overhead resistance from their recent sell-offs, so those indexes will likely be the first to break down to new lows if another round of selling hits the market. The current dynamic in the market is rather unusual, as the price divergence within the main stock market indexes is quite substantial. Other than sitting in cash, which is never a bad idea, the only logical thing we can do is follow the trends through buying strong sectors in the Nasdaq when they pull back, and/or selling short the weak sectors in the S&P/Dow when they bounce into resistance.

Open ETF positions:

Long - (none)
Short - XLU, OIH

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and Morpheus Trading Group, a trader education firm launched in 2001 that provides daily technical analysis of the leading ETFs and stocks. For a free trial to the full version of The Wagner Daily or to learn about Wagner's other services, visit MorpheusTrading.com or send an e-mail to deron@morpheustrading.com.