Stocks followed up Tuesday's impressive gains with a healthy session of price consolidation that led to mixed results yesterday. The major indices opened moderately lower, reversed to briefly probe into positive territory by early afternoon, then drifted back down in the final ninety minutes of trading. The Nasdaq Composite lost 0.7%, the S&P 500 slipped 1.0%, and the Dow Jones Industrial Average finished 1.1% lower. Despite losses in the more well-known stock market indexes, small and mid-cap stocks stealthily built on their previous day's gains; the Russell 2000 rose 0.9% and the S&P Midcap 400 gained 1.0%. The Nasdaq Composite closed in the middle of its intraday range, as the S&P 500 and Dow Jones Industrials settled near the bottom third of their ranges.

Total volume in the NYSE was 13% lighter than the previous day's level, while volume in the Nasdaq similarly eased 4%. The lower turnover in both exchanges prevented the S&P and Nasdaq from registering a bearish "distribution day." Higher turnover on a pullback that followed Tuesday's strong breakout would have been a warning sign that hinted at institutional selling into strength, but that wasn't the case.

One of the top performing industry sectors yesterday was alternative energy — specifically, solar energy. Of the handful of ETFs correlated to the alternative energy industry, Market Vectors Global Alternative Energy (GEX) turned in the best performance yesterday. GEX showed great relative strength by rallying 4.9% while the broad market was mostly lower. More importantly, it broke out above the high of a three-week base of consolidation and joined the growing ranks of ETFs trading above their 50-day moving averages. The daily chart of GEX is shown below:



The GEX breakout above consolidation and its 50-day MA creates a "swing trade" opportunity to play the short-term bullish momentum in the sector. However, if buying GEX near its current price, consider keeping a tight initial stop, just below yesterday's low of 20.91, to protect against the possibility of a failed breakout. Convergence of the 10-day moving average and 20-day exponential moving average at yesterday's low provides further reason for a stop below the low.

We've been long iShares Xinhua China 25 (FXI) since December 5, the first day it broke out to close firmly above its 50-day moving average. The following day, FXI gapped sharply higher, and has been consolidating in a tight, sideways range since then. Even though the trade is already showing an unrealized gain of 3.6 points (13.1%), it's actually setting up for a secondary buy entry if you missed our first entry on December 5. This is shown on the daily chart of FXI below:



The blue horizontal line on the chart above marks the trigger point for a secondary buy entry into FXI, just above yesterday's high of $31.41. If entering at this secondary buy point instead of the original entry, a tighter stop is recommended. Consider a stop below the 10-day moving average and December 16 low, around $29.20. As FXI is already trading well above its November highs, as well as its 50-day moving average, it's been showing substantial relative strength to the domestic markets. If the recovery in the U.S. continues in the short to intermediate-term, expect FXI to outperform the gains of the S&P, Nasdaq, and Dow.

In yesterday's Wagner Daily, we analyzed the next significant resistance levels in the major indices. In each index, last week's highs was the first level of resistance we pointed out, while the next major levels of resistance were substantially further away, around the November 4 highs. When the main stock market indexes rallied in the first half of yesterday's session, it was the mid-day move to last week's highs that indeed triggered the pullback into the close. Still, we believe Tuesday's breakouts above the 50-day MAs should generate enough short-term momentum to lift the major indices above last week's highs within the next day or two. If not, we will be forced to re-assess the technical situation early next week. For now, however, the overall short to intermediate-term picture still looks fine.

Open ETF positions:

Long - FXI, INP, QLD, SMH
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.