Stocks got off to a scary start last Friday morning, as worse than expected jobs data sent the major indices approximately 3% lower within the first hour of trading. But despite having the perfect excuse for shooting itself in the foot, the market stabilized and reversed sharply higher in the afternoon. The Nasdaq Composite raced 4.4% higher, the S&P 500 climbed 3.7%, and the Dow Jones Industrial Average rallied 3.1%. The small-cap Russell 2000 and S&P Midcap 400 indices gained 4.9% and 4.8% respectively. All the major indices closed at their intraday highs, positioning stocks for a positive start this week.

Higher turnover accompanied last Friday's gains, enabling both the S&P 500 and Nasdaq Composite to score a bullish "accumulation day," the third within the past five trading sessions. Total volume in the NYSE rose 7% above the previous day's level, while volume in the Nasdaq ticked 10% higher. Market internals were also quite healthy. In both exchanges, advancing volume beat declining volume by a margin of 6 to 1. Last week, there were three days of higher volume gains, and two days of lower volume losses. This price to volume relationship of the market hints at institutional of institutional buying, and is a refreshingly bullish change from the previous pattern of higher volume losses and lighter volume gains. We monitor daily volume patterns in the market because volume is the one technical indicator that never lies. Volume is also a leading, not a lagging, indicator of price action.

In the December 5, 2008 issue of The Wagner Daily, we illustrated the potential buy setup in iShares Xinhua China 25 (FXI). Specifically, we liked how FXI showed relative strength to the broad market last month by forming a "higher low," while the major indices formed "lower lows." That relative strength was again present in last Friday's session; FXI remained in positive territory throughout the morning, even as the main stock market indexes showed losses of several percent. When the broad market began to reverse higher in the afternoon, FXI outperformed on the upside, breaking out above resistance of its 50-day moving average (MA) and recent consolidation as well. The breakout which triggered our buy order into FXI is shown on its daily chart below:



With the stock market set to open significantly higher this morning, FXI is already trading nearly 6% higher in the pre-market. If you happened to miss our initial entry into FXI, consider buying any pullback to support of the breakout area ($27.50 to $28), or the first touch of the 20-period exponential moving average (EMA) on the hourly chart. We expect FXI to continue outperforming on the stock's market's "up" days, while losing less than the major indices on the "down" days.

Another international ETF we're monitoring is iPath India Index (INP). Unlike FXI, INP set a "lower low" alongside of the domestic markets in late November. However, it's been showing relative strength in the short-term, and just closed above its 20-day EMA. A rally above last Friday's high will also correlate to a breakout above both its intermediate-term downtrend line and short-term consolidation. The 50-day MA is still overhead, about 4 points above its current price, but momentum of a breakout could easily carry INP through its 50-day MA. Alternatively, one could quickly sell into strength and still lock in a decent gain if INP stalls on the test of its 50-day MA:



One of the few industry sector ETFs now trading above its 50-day moving average is Retail HOLDR (RTH). Despite weak reports on employment and consumer spending, retail has been seeing institutional money flow lately. Even though the actual reason for strength in the sector doesn't matter, one could theorize that the bad news has already been built into the price of these stocks. As RTH rose above its 50-day MA last Friday, notice how volume also rose above its 50-day average level, indicating institutional demand:



For RTH, consider a buy entry on a pullback to new support of its 50-day MA, which also converges with the "swing high" of November 26 - 27. This is marked by the dashed horizontal line, around the $73.75 to $74 area.

As for the broad market, last week's resilience was impressive. Though the benchmark S&P 500 fell nearly 9% on Monday, the bulls stepped in to limit the weekly loss to just over 2%. More importantly, all the major indices closed above their 20-day EMAs, and are also poised to breakout above their intermediate-term downtrend lines. If today's pre-market strength remains to the opening bell, the major indices could have key technical breakouts as early as today. Take a look at the daily chart of the S&P 500 below (other stock market indexes have similar patterns as well):



On a more subtle note than the chart patterns of the market, we should also consider how stocks not only brushed off last Friday's worse-than-expected employment data, but actually rallied sharply higher on the news. Throughout October and November, the stock market sold off on just the slightest amount of negative economic new. Now, however, we saw an instance where negative news led to a positive reaction to equity prices. Several times last week, we mentioned the previous bearish sentiment in the overall market was changing; last Friday's session is more confirmation of such. We don't know how long the bullishness of the counter-trend bounce will last before the bears resume control, especially with resistance of the 50-day moving averages still overhead. Nevertheless, we'll take advantage of the most ideal short to intermediate-term ETF buying opportunities while we can.

Open ETF positions:

Long - 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.