The Dow's test of its 50-day moving average provided the perfect excuse for stocks to pull back yesterday, but lower turnover kept the broad market looking good "under the hood." After opening slightly lower, the major indices attempted a bullish reversal in the first ninety minutes of trading, but enthusiasm fizzled out, causing stocks to drift lower throughout the afternoon. The Nasdaq Composite lost 1.6%, the S&P 500 2.3%, and the Dow Jones Industrial Average 2.7%. The small-cap Russell 2000 and S&P Midcap 400 indices slipped 3.3% and 2.6% respectively. The main stock market indexes closed just above their intraday lows.

Total volume in the NYSE receded 16% below the previous day's level, while volume in the Nasdaq decreased 1%. The losses on lighter volume tells us institutions were not aggressively dumping shares of stock, which enabled both the S&P 500 and Nasdaq Composite to avert the bearish label of a "distribution day." So far this month, there have been three "down" days in the S&P and Nasdaq, and four "up" days. Volume eased in each of the "down" days, while turnover ticked higher in each of the "up" days. A healthy price to volume relationship such as this is necessary in order for the broad market's potential intermediate-term trend reversal to "stick."

The beaten-down chip stocks turned in impressive performances yesterday, as the well-known Philadelphia Semiconductor Index ($SOX) zoomed 4.8% higher. Considering the major indices closed several percent lower, the nearly five percent gain in the $SOX was even more positive. Upon noticing such relative strength in the semiconductor sector, we quickly checked out the various semiconductor ETFs, and were pleased to be find they were all trading at much higher than average volume as well. The combination of the relative strength and high volume in the sector prompted us to buy the Semiconductor HOLDR (SMH), which also broke out firmly above its 20-day exponential moving average (EMA) yesterday. On the daily chart of SMH below, notice how institutional demand caused volume to swell to more than double the average level of 14.3 million shares



Per Intraday Trade Alert to subscribers of The Wagner Daily, we bought SMH when it pulled back to its 20-period exponential moving average (EMA) on the 15-minute chart interval. When stocks and ETFs breakout on strong volume, with clear relative strength, the 20-EMA/15 minute often provides an ideal entry point for a short-term momentum trade. The 20-EMA on the 60-minute chart is even more solid support, but if volume and relative strength are significant, the touch of the 20-EMA/60 min. may not come until days after the initial breakout, at a substantially higher price.

Joining the small list of ETFs that have broken out above their 50-day moving averages is Market Vectors Agribusiness (MOO). Comprised of a portfolio of agriculture-related stocks, MOO rallied above both its intermediate-term downtrend line and 50-day MA yesterday. The breakout above both key resistance levels could lead to decent upward momentum in the short to intermediate-term, but we don't like that volume remained well below its 50-day average level. The MOO breakout is shown on the daily chart below:



On Monday (December 8), the main stock market indexes gapped up and held above their 20-day EMAs and intermediate-term downtrend lines, both key technical events. Fortunately for the bulls, yesterday's sell-off was not large enough to change this situation — the 20-day EMAs and prior downtrend lines are still acting as new support below. Just overhead, the major indices still must contend with their 50-day MAs. However, there have not yet been any signs to indicate this bear market's counter-trend bounce is running out of gas. Until then, we remain cautiously and very selectively bullish.

Open ETF positions:

Long - FXI, INP, SMH, USO
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.