Stocks concluded the holiday-shortened week with a third consecutive day of sizeable gains that enabled the major indices to break out above resistance of their multi-week highs. Like the previous session, the main stock market indexes opened slightly higher, then rose steadily throughout the day. The Nasdaq Composite jumped 3.5%, the S&P 500 rallied 3.2%, and the Dow Jones Industrial Average advanced 2.9%. The small-cap Russell 2000 and S&P Midcap 400 indices gained 1.3% and 2.4% respectively. Each of the major indices finished near its intraday high.

One negative of last Friday's session is that the powerful gains occurred on lighter volume that was well below average levels. Total volume in the NYSE declined 18%, while volume in the Nasdaq eased 7% below the previous day's level. Considering Friday was wedged between a holiday and a weekend, it wasn't surprising turnover was less than average. Still, it would have been more encouraging if trading had at least exceeded the previous day's pace. Regardless, since the prior day was also the last session of the calendar year, Wednesday's volume levels were probably inflated due to last-minute "window dressing" of portfolios. Market internals remained quite bullish. In the NYSE, advancing volume beat declining volume by a margin of 7 to 1. The Nasdaq adv/dec volume ratio was positive by 9 to 1.

In addition to SPDR Gold Trust (GLD), which recently broke out above resistance of its 200-day MA and five-month downtrend line, other commodity ETFs have also begun to act well. Last Friday, the beaten-down U.S. Oil Fund (USO) broke out to close above resistance of its 20-day exponential moving average (EMA) for the first time in more than three months. Despite lighter overall volume in the broad market, it's notable that turnover in USO swelled to more than double its average daily volume in each of the past two days. This hints at buying interest amongst mutual funds, hedge funds, and other institutions. Below is a chart of USO, which is roughly designed to follow the price of the crude oil commodity:



Encouraged by the bullish price action and strong volume of December 31, we bought USO on January 2, after it rallied above the high of its first twenty minutes. But with this buy entry, realize we are not calling a long-term bottom -- it's too early in the trend reversal stage to do so. Rather, we're simply taking advantage of the momentum from a counter-trend bounce, with a breakout above the 20-day EMA and higher than average volume favoring the trade. For now, we intend USO to only be a short-term trade, with an upside price target around the 50-day MA ($42 to $43 area).

A popular ETF proxy of commodities overall is DB Commodity Index Tracking Fund (DBC). On its daily chart below, observe the "double bottom" pattern that has recently formed. Like USO, notice DBC has also closed above its 20-day EMA for the first time in months:



Since we're already long silver, gold mining, and crude oil ETFs, we will probably not buy DBC. Nevertheless, we still like DBC for a short-term, possibly intermediate-term, trade. Two possible buy entries could be considered: a pullback to support of the 20-day EMA (around $21 - $21.20) or a breakout above the December 12 high of $22.50 (which converges with resistance of the 50-day MA). One could also consider a partial entry on a pullback, then adding the remaining shares on a move above the 50-day MA.

In the January 2 issue of The Wagner Daily, we illustrated how the S&P 500 had rallied above its 50-day MA, but was still below resistance of its "swing high" from mid-December. Last Friday's rally changed the situation, as the index has broken out to a fresh multi-week high:



After three straight days of solid gains, the S&P 500 could easily pull back in the coming days. However, both the mid-December breakout level (919 area) and the 50-day MA (887 area) should act as support on any retracement. Unless both of those key short-term term support levels are broken, we view a pullback as a buying opportunity in the market, not the time to sell short. Scared by the losses of the past year? Convinced the economy is going to get worse before it gets better? Perhaps so, but neither of those factors have anything to do with the technical state of the market right now. Don't forget to trade what you see, not what you think!

Open ETF positions:

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