On Wednesday, the main stock market indexes shocked investors by sustaining average losses greater than 4%. Then, just as quickly, stocks amazingly roared back to recover all their losses yesterday. After opening higher, stocks sold off throughout the morning, dropping substantially into the red by mid-day, but the bulls took control in a big way during the final hours of trading. The Nasdaq Composite rallied 4.8%, the S&P 500 4.3%, and the Dow Jones Industrial Average 3.9%. Small-caps scored enormous gains, as the Russell 2000 Index surged a whopping 7.0%! The S&P Midcap 400 motored 4.9% higher. Opposite of the previous day, all the major indices closed at their intraday highs.

In both exchanges, turnover shot to its highest levels of the year, handily exceeding the already active pace of recent days. Total volume in the NYSE spiked 14% above the previous day's level, while volume in the Nasdaq swelled 24%. The gigantic gains on equally large volume represented an "accumulation day" that was indicative of institutional buying. As was to be expected, market internals were also quite strong. Advancing volume in the NYSE exceeded declining volume by more than 7 to 1. The Nasdaq adv/dec ratio was positive by nearly 9 to 1.

Well, what can we possibly say here to make sense of what's happening out there? The last few days of trading have been absolutely insane! Just when it seemed the sky is falling and the world is about to end, the stock market parties like it's 1999. Daytraders who seek to profit purely from intraday volatility may have been having a blast lately, but it's been extremely challenging for swing traders who focus on steady trends over a period of days or weeks. Frankly, we're glad we had no ETF positions yesterday, as both long and short positions would have been a challenge to manage, based on the whipsaw price action.

Remember that "capitulation day" we thought occurred on September 16? It seems we were just two days early, as yesterday's market action was even more indicative of capitulation than Tuesday's session. Volume was much higher than it was on September 16, the intraday volatility and bullish reversal was much more substantial, and end-of-day strength was greater. But will we see upside follow-through this time, or will we be down another 3 or 4% within the next day or two? If this morning's pre-market indications are any clue, it's going to be another wild session.

News that the U.S. government is working on a serious attempt to fix the financial problems with a new fund got traders and investors in an incredibly bullish mood overnight. As of two hours before the open, both the S&P and Nasdaq futures are indicating a gap up of more than 3%. This, of course, is already on top of yesterday's huge gains. After yesterday's session, we had a few ETFs in mind for potential long entry if stocks consolidated for a day or two and proved they could hold their gains. However, with such aggressive, violent gaps in the market from day to day, it's been very difficult for disciplined, patient traders to find low-risk entry points in new positions. With more than a 100-point move in the S&P 500 in less than two days, buying new ETF positions this morning certainly does not offer a good reward/risk ratio. Conversely, it's equally risky to blindly sell short in the face of such momentum. Further, note that today is "quadruple witching" options expiration day, which typically makes for volatile trading conditions in and of itself.

At this point, our only realistic plan of action is to see how today's session plays out, particularly with regard to whether or not the opening gap holds up. Then, as we enter next week, we'll have a fresh list of bullish ETF setups on our radar screen to stalk for buy entry on a pullback. Hopefully, such a pullback will be moderate, and not result in giving back 100% of the massive gains of yesterday and this morning.

Open ETF positions:

Long - (none)
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.