As anticipated, the Nasdaq's strength in the final hour of Wednesday's session followed through with bullish momentum yesterday. Unfortunately, the S&P and Dow lagged behind. After rallying steadily throughout the morning, the Nasdaq Composite chopped around in a sideways range throughout the rest of the day before finishing 1.3% higher. Showing relative weakness, the S&P 500 and Dow Jones Industrial Average gained just 0.5% and 0.4% respectively. The small-cap Russell 2000 and S&P Midcap 400 both matched the Nasdaq's 1.3% advance. A bit of selling in the final thirty minutes caused the major indices to finish around the upper 40% of their intraday ranges.

Turnover rose across the board, enabling both the S&P and Nasdaq to score a bullish "accumulation day." Total volume in the NYSE rose 8%, as volume in the Nasdaq increased 17% above the previous day's level. After a string of light volume consolidation days, it was bullish that higher trading activity accompanied yesterday's gains. This tells us institutions such as mutual funds and hedge funds were more active in yesterday's session. Nevertheless, volume in both exchanges remained below 50-day average levels. It's been fifteen days since turnover in the Nasdaq exceeded its average level. We would certainly feel more confident on the bullish side of the market if trading surges back above average on the market's next "up" day.

On August 8, we pointed out the relative strength and bullish patterns setting up in the Biotech Index ($BTK) and several ETFs in that sector. After a two-day pullback, the $BTK zoomed 4.7% higher yesterday and closed above its 200-day moving average for the first time since January 17 of this year. Yesterday's price action again confirmed the new-found rotation of institutional money into the biotech arena. The strength in the $BTK enabled the iShares Nasdaq Biotech (IBB) to close above its downtrend line that has been in place for the past six months. Its breakout is shown on the daily chart below. A rally above its 200-day MA, just one point higher, will confirm the breakout:



As sector traders, our job is to continually find the shifts in institutional sector rotation, then simply ride the coattails of the "smart money." The recent bullish divergence and relative strength of the Biotech Index means the sector may provide the lowest risk, highest profit potential of any industry right now. When the sector rotation becomes too obvious, it's often too late to realize any substantial gains with a positive risk/reward ratio. In addition to IBB, there are several other biotech ETFs with similar chart patterns. For easy reference, download the free Morpheus ETF Roundup.

In yesterday's commentary, we said of Wednesday's action, "One might argue that buying yesterday's pullback was "risky," but the plethora of support levels made it a well-defined risk with a positive risk/reward ratio. In this business, taking precisely calculated risks is what we get paid for!" Our calculated risk of buying the Ultra QQQ ProShares (QLD) and iShares Xinhua China 25 (FXI) paid off yesterday. QLD followed through on Wednesday's late-day move above its hourly downtrend line by rallying 2.4% yesterday. Like the entire "Ultra" family of ProShares ETFs, QLD is designed to follow the price of the underlying index (the Nasdaq 100 in this case) at a leveraged ratio of 2 to 1. FXI also outperformed the broad market by rallying 3.4% and snapping firmly back above its 50-day MA. Now that we've got a solid profit buffer on both positions, we have trailed stops higher in order to eliminate risk in the event of a reversal back down. Regular subscribers to The Wagner Daily should note our updated stop prices below.

Because of the mediocre gains in the S&P and Dow, yesterday's session may have seemed pretty lame. However, the rallies of more than 1% in the Nasdaq, Russell 2000, and S&P Midcap 400 were quite solid. Further, many leading stocks logged impressive gains, a requisite of bullish markets. It would be nice to see the S&P and Dow catch up today, along with further gains in the Nasdaq. But as long as the April 9 lows are not violated, the near-term bias remains cautiously bullish.

Open ETF positions:

Long - QLD, FXI
Short - (none)

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.