After a week of choppy, range-bound trading, stocks made a definitive move to the upside yesterday. The major indices trended higher throughout the morning, consolidated throughout the afternoon, then concluded the day with a powerful surge in the final thirty minutes of trading. It was the first full uptrending day since December 16, the first day the S&P 500 popped above its 50-day moving average (MA) in months. Coincidentally, the S&P 500 moved back above its 50-day MA yesterday as well. The Nasdaq Composite rose 2.7%, the S&P 500 2.4%, and the Dow Jones Industrial Average 2.2%. The small-cap Russell 2000 soared 3.6%, as the S&P Midcap 400 climbed 3.4%. All the main stock market indexes closed at their best levels of the day.

Turnover rose above the previous day's levels, enabling both the S&P 500 and Nasdaq Composite to register a bullish "accumulation day." Total volume in the NYSE ticked 8% higher, while volume in the Nasdaq increased 14% above the previous day's level. Still, trading ahead of the New Year's Day holiday remained lighter than average. One highlight was that advancing volume in the NYSE exceeded declining volume by a margin of nearly 9 to 1. The Nasdaq adv/dec volume ratio was positive by 3 to 1.

The major indices have finally begun to move out of their recent volatility contractions, and have initially appeared to resolve the tight, sideways ranges to the upside. Most notably, both the S&P 500 and Dow Jones Industrial Average moved (marginally) back above their 50-day moving averages yesterday, while the Nasdaq Composite closed right below its 50-day MA. Below is the daily chart of the S&P 500:



On December 16, the S&P 500 rallied to close above its 50-day MA for the first time in nearly four months. But two days later, the index fell back below it. Will the same thing happen again? Given the low volume in which the current rally is occurring, it's a fair possibility, but there are two reasons the S&P's breakout above the 50-day MA may "stick" a bit longer this time.

When the S&P 500 closed above its 50-day MA on December 16, the breakout occurred on the initial test of the 50-day MA. Because the 50-day MA is such a pivotal level of support or resistance, it's unusual for the first test of the 50-day MA to follow-through. Instead, stocks more commonly bump into their 50-day MAs, retrace for a week or two, then make another run at the 50-day MAs thereafter. Typically, it is only on the second, or even third try, that the breakout holds up. Since the initial pullback after the December 16 breakout led to several successful tests of horizontal price support (the horizontal blue line on the chart above), this current thrust above the 50-day MA has a better chance of "sticking."

Another major difference between yesterday's S&P 500 rally above the 50-day MA and the same move on December 16 is the price action of leading individual stocks. Even though we focus on trading ETFs, rather than individual stocks, it's the leadership of individual stocks consolidating at their highs that drives a strong overall market. As memory serves us, there were only two or there stocks building bases of support near their highs when the S&P 500 broke out above its 50-day MA on December 16. The situation has improved substantially since then. Though we're certainly not yet in a bull market, there are now quite a few individual stocks exhibiting bullish chart patterns near their highs. As these stocks begin to break out to new highs, it should lead the stock market higher as well.

In recent weeks, overall day-to-day volatility has dried up significantly. Yesterday's average gains of 2.5% in the major indices would have equated to gains of about 5% a month or two ago. Yet, ironically, leading stocks and top industry sectors now have better patterns that could lead to much more sustainable breakouts. Dare we say this is a market that is finally starting to trend more "normally?" If not for being stuck in a low-volume holiday period, we would indeed dare to say this is the case, but we won't know the real intentions of the "smart money" until at least next week. When traders start returning to their desks after New Year's Day, the market should more clearly show its hand for the direction of the next intermediate-term trend.

Open ETF positions:

Long - SMH, INP, FXI, GDX, SLV
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.