For the first time in months, stocks followed up a big day of gains with another strong advance, but lower turnover across the board was disappointing. The major indices gapped higher on the open, continued climbing throughout the morning, then made another leg higher late in the afternoon. The S&P 500 rallied 6.5%, the Nasdaq Composite 6.3%, and the Dow Jones Industrial Average 4.9%. Small and mid-cap stocks perked up, as the Russell 2000 and S&P Midcap 400 indices gained 7.4% and 7.5% respectively. A bit of profit taking in the final minutes of trading caused stocks to close off their best levels of the day, but the major indices still finished in the upper quarter of their intraday ranges.

Total volume in the NYSE decreased 8%, while volume in the Nasdaq was 16% lighter than the previous day's level. In yesterday's commentary, we expressed concern that last Friday's gains occurred on temperate volume, and it's unfortunate that turnover during yesterday's rally also failed to surge higher. Nevertheless, market internals were quite bullish. Advancing volume in the NYSE exceeded declining volume by nearly 12 to 1. The Nasdaq adv/dec volume ratio was positive by more than 15 to 1. Based on these readings, it was the broadest-based rally we've seen in quite a while.

The U.S. dollar has been on a tear in recent months, but momentum may be reversing. The PowerShares U.S. Dollar Index (UUP) was consolidating at its high, but it broke down below support of its 20-day exponential moving average (EMA) yesterday. Conversely, the CurrencyShares Euro Trust (FXE) rallied above its 20-day EMA. This may create a short to intermediate-term buying opportunity in FXE. Below, the daily chart of FXE illustrates the breakout above the 20-day EMA:



The blue horizontal line on the chart above marks resistance of the prior high from November 13. Yesterday's rally put FXE above its 20-day EMA, as well as its prior high. This creates a short-term buying opportunity to enter FXE on a rally above yesterday's high of 129.61. The upside price target is resistance of the 50-day MA, presently at 133.69. If entering over yesterday's high, an ideal stop is below yesterday's low and the 20-day EMA, around the 127.50 area. Regular subscribers to The Wagner Daily will see our detailed trigger, stop, and target prices below.

Yesterday, we illustrated how the S&P 500 would need to contend with overhead resistance of its prior lows from October 2008, which converged with its 10-day moving average. Not surprisingly, that area of resistance "did its thing;" the S&P 500, as well as several other main stock market indexes, closed right at resistance of its prior low and 10-day MA. Below, the daily charts of the S&P 500 and Nasdaq Composite clearly show these areas of resistance in action:





Going into yesterday's session, we were, with very good reason, skeptical about the stock market's ability to build on last Friday's gain. Since the beginning of October, there had been three other sessions of similar gains that immediately fizzled out in the days that followed. This time, however, stocks actually managed to score a second straight round of solid gains. Volume was unimpressive, but price action was not. Perhaps last week's "undercut" of the year 2002 lows in the S&P 500 was indeed the necessary impetus for stocks to stage a meaningful bounce off their lows. In yesterday's Wagner Daily, we said our plan was to wait for confirmation that the major indices could move back above last month's lows, then buy the first pullback to support. Our overall plan of action remains the same, as entering new long positions before stocks confirm their bottoming action is not a good proposition. It's equally risky to jump back in on the short side of the market without waiting for a sign that the rally is done.

For those new to trading and/or this newsletter, the concept of staying mostly in cash, and taking a few shots here and there with reduced share size, is tough to grasp. Many new traders are anxious to test out new strategies/methods, and have expectations of outperforming the market every single month. But we've learned the hard way, through years of experience, that knowing when to go full throttle, and when to apply the brakes, is the key to long-term success as a trader. Capital preservation during indecisive and erratic market conditions enables us to be in the game for the long-term, so that we can aggressively take advantage of opportunities when the good times return.

The stock market is closed this Thursday for the Thanksgiving holiday, and will close three hours early on Friday. One final thought is that many traders and investors will want to be liquid ahead of the holiday weekend. As such, we suggest being proactive with tight stop placement on any long positions you may have. Ideally, the major indices will pop above resistance of their October highs, then pull back to present ideal buy entries early next week. We'll definitely be prepared to take advantage of potential opportunity if that occurs. Regardless, we're certainly ready to trade what we see, not what we think!

Open ETF positions:

Long - DGP, FXY
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.