Ignoring the swift sell-off into the previous day's close, the major indices opened several percent higher, then traded in a relatively narrow, sideways range throughout the entire day. The S&P 500 gained 2.6%, the Nasdaq Composite 2.5%, and the Dow Jones Industrial Average 2.1%. Small and mid-cap stocks, which fell the most throughout this month's decline, showed relative strength for a second straight day. The Russell 2000 climbed 4.8%, as the S&P Midcap 400 advanced 4.2%. Both of these indexes also finished at the top of their intraday trading ranges, but the S&P 500, Dow Jones Industrials, and Nasdaq all closed just below their morning highs.

Total volume in the NYSE declined 15%, while volume in the Nasdaq decreased 6% below the previous day's level. Although the lighter volume prevented the broad market from scoring what would have been its second "accumulation day" this week, stocks basically just consolidated yesterday. If not for the opening gap up, the main stock market indexes would have merely finished near the flat line. As such, we don't think it's negative that lower turnover accompanied yesterday's gains. Further, market internals were quite solid. Advancing volume in the NYSE exceeded declining volume by a healthy margin of nearly 5 to 1. The Nasdaq adv/dec volume ratio was positive by 3 to 1.

As stocks continued to digest their October 28 gains, volatility settled down for a change. Yesterday's intraday trading range of the S&P 500, for example, was the lowest it has been since October 1. The 35-point range from yesterday's low to high still represented a significant range of nearly 4%, but that's only about half the intraday volatility stocks have been experiencing lately. We view this lower volatility as a good thing because less erratic action means swing traders are less likely to stop out of good technical trade setups. We also think the market will continue to settle down next month, enabling volatility to return to more "normal" levels.

Overall, we like how the market has been acting the past several days. Yesterday's gains were quite solid, but not frenzied. The two-day price consolidation has also been tight, and a handful of individual stocks have begun to outperform the broad market. Taking an updated look at the daily chart of the S&P 500, notice how the index is now poised to break out above its 20-day exponential moving average (EMA):



As you can see, the S&P 500 has remained below its 20-day EMA (the beige line) throughout the entire month of October. Last month, the index only closed above its 20-day EMA once (September 19). As such, a sustainable move above the 20-day EMA would definitely be a positive change of character for the overall market, at least in the short to intermediate-term. The Dow Jones Industrial Average and Nasdaq Composite have similar daily chart patterns as well. Regular subscribers to The Wagner Daily should note our new ETF trade setup below, which is likely to trigger for buy entry if the major indices break out above their short-term consolidations. Review yesterday's newsletter for a list of ETFs we're stalking for potential buy entry. As for the short side, we're presently not looking for new entries. However, we will start to do so as the major indices approach key resistance of their 50-day MAs or suddenly start to roll over again, whichever comes first.

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.