Finally providing relief to the past week of intense selling pressure, the main stock market indexes rocketed higher yesterday, scoring monstrous gains rivaled only by the historical advance of October 13. Gapping several percent higher on the open, then subsequently erasing those gains by mid-day, stocks initially appeared to be headed for another day of losses. But after "shaking out" the bulls one more time, the broad market aggressively reversed higher in the afternoon. The Dow Jones Industrial Average zoomed 10.9% higher, the S&P 500 10.8%, and the Nasdaq Composite 9.5%. Continuing to exhibit slight relative weakness were the small-cap Russell 2000 and S&P Midcap 400 indices, which advanced 7.6% and 8.6% respectively. Strong momentum into the close helped the major indices finish at their absolutely highest levels of the day.

Aside from the obviously strong percentage gains, it was also encouraging that higher turnover accompanied the massive rally. Total volume in both the NYSE and Nasdaq surged 21% above the previous day's levels, and also moved back above 50-day average levels. The higher volume gains enabled both the S&P 500 and Nasdaq Composite to register a bullish "accumulation day" that was indicative of institutional buying across the board. Not surprisingly, market internals were also quite positive. Advancing volume in the NYSE trounced declining volume by a margin of 19 to 1. The Nasdaq adv/dec volume ratio was nearly 7 to 1.

In yesterday's Wagner Daily, we cautioned against immediately jumping into the market's large opening gap up that was indicated by strong pre-market futures action. Specifically, we said, "However, even if the S&P 500 and Nasdaq 100 open at these levels, realize the main stock market indexes will still be trading below yesterday's (October 27) highs; the broad market's drop in the final fifteen minutes of trading was so swift. Further, since yesterday's intraday highs of the major indices were roughly on par with their October 24 highs, consider waiting for a rally above the highs of the past two days before entertaining the thought of any long positions. Such a rally would also put the main stock market indexes back above their 20-period exponential moving averages on the hourly charts (20-EMA/60 min.), which has perfectly acted as resistance over the past week. . .Unless the major indices break out above resistance of their two-day highs and 20-EMA/60 min., there remains a strong chance stocks will just continue to chop around in the sideways ranges they've recently established." Based on the morning price action that followed, our advice turned out to be prudent. Take a look at the hourly chart of the S&P 500 SPDR (SPY), a popular ETF proxy for the S&P 500 Index:



Although SPY opened several percent higher yesterday, notice how it opened right near the middle of the previous day's range. As anticipated, overhead supply from the previous afternoon's sell-off, combined with continued resistance of the 20-EMA/60 min. (the beige line), quickly led to selling pressure in the first two hours of trading (annotated by the yellow-shaded rectangle). As a result, SPY's opening gain of nearly 5% had dwindled to a gain of less than 1% by 11:00 am ET. After stocks stabilized, buyers returned in the afternoon, enabling SPY to reverse higher. Less than ninety minutes before the closing bell, SPY convincingly broke out above its 20-EMA/60 min. (circled in pink), which had perfectly been acting as resistance since SPY fell below it on October 22. This was the first signal for a potential reversal of short-term momentum, and an ideal time to cover any remaining short positions. An hour later, SPY confirmed its bullish reversal by also breaking out above resistance of its two-day high (the red horizontal line).

Despite the main stock market indexes rallying above the pivotal short-term resistance levels discussed above, there were two reasons we held off on buying any new ETFs yesterday. First, the memory of the stock market's dreadful follow-up performance to its last day of big gains is fresh in our minds. After the major indices logged some of their largest gains in history, on October 13, we patiently waited for the Dow Jones Industrial Average to pull back to support of its 20-EMA/60 min. the following day, then bought the Ultra Dow 30 ProShares (DDM). But even though we waited for a proper, ideal entry point, the stock market "rewarded" us by completely erasing all of the Dow's 11% gain just one day later. A week later, the Dow closed at a new multi-year low. We're not implying yesterday's rally will definitely fail as well; rather, we're waiting for a bit of price confirmation. As we've seen lately, bear market rallies can be very powerful, but extremely short-lived. On a positive note, however, we like that yesterday's rally occurred on significantly higher volume. The October 13 rally actually occurred on lighter turnover.

The second reason we resisted any new buy entries is today's meeting of the Federal Open Market Committee (FOMC). Though the Fed is widely expected to announce a 50 point interest rate cut later this afternoon, we generally avoid entering new positions directly ahead of a Fed day. This is because the market's knee-jerk reaction and subsequent volatility is largely unpredictable. It's better to make sure the market remains stable after today's Fed announcement before joining the bulls.

Meanwhile, our open position in Double Gold Long (DGP) is looking good. Recall from our recent buy entry that we're merely playing a bounce off long-term support of gold's 200-week moving average. Over the past three days, spot gold has been consolidating in a tight range, near its recent high. We expect a breakout above that range within the next one to two days. Our upside target in DGP is simply resistance of its 50-day moving average, around the $17.40 area.

Assuming the market doesn't collapse after today's Fed announcement, we'll be on top of ETFs exhibiting the most relative strength and best chart patterns in the coming days. Don't worry about missing the rally; if it's for real, there will be plenty more upside in the weeks that follow. Instead, remain on guard in case the market fools the bulls in the near-term. It's certainly had a bad habit of doing so lately. Stay tuned for our updated assessment of the most promising ETF chart patterns.

Open ETF positions:

Long - DGP
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.