Aided by a handful of better than expected corporate earnings reports, the Nasdaq scored its second straight day of significant gains. This time, the rest of the major indices rallied as well. The Dow Jones Industrial Average climbed 1.8%, the S&P 500 1.6%, and the Nasdaq Composite 1.5%. The small-cap Russell 2000 and S&P Midcap 400 indices advanced 0.7% and 0.8% respectively. A solid afternoon performance enabled all the main stock market indexes to finish near their best levels of the day.

The most encouraging aspect of yesterday's market action was that higher turnover accompanied the stock market's gains. Total volume in both the NYSE and Nasdaq edged 2% above the previous day's levels. Considering both the S&P 500 and Nasdaq Composite suffered a bearish "distribution day" only two days prior, it was positive that stocks bounced back with a round of higher volume gains. The longer the market continues displaying regular signs of institutional buying, the better the chance of a sustainable, real recovery from the November 2008 lows. Because mutual funds, hedge funds, and other institutions account for more than half of all stock market activity, overall market direction is typically dependent on whether the "big boys" are accumulating or distributing shares. That's why we constantly monitor and track sessions of higher volume gains ("accumulation days") and higher volume losses ("distribution days").

Yesterday, we illustrated how iShares Nasdaq Biotech (IBB) had been showing relative strength and was poised for breakout. As anticipated, its breakout came yesterday, as the Biotech Index ($BTK) led the Nasdaq with a 3.7% gain. While biotech ETFs such as IBB, BBH, and PBE motored higher yesterday, the actual $BTK Index had a convincing breakout above the high of its recent consolidation. This is shown below:



If the overall market holds up, biotech has a good shot at becoming a leading industry sector. As per yesterday's plan, we bought IBB when it rallied above its four-day high. The clear relative strength in biotech makes IBB a better play than attempting to navigate the choppy performance of broad-based ETFs.

The Nasdaq Composite's recovery of the past two days has once again positioned the index to test resistance of its 50-day moving average (MA), which is now converging with the 20-day exponential moving average (EMA) as well. On the daily chart below, notice how frequently the 50-day MA (the teal line) has acted as resistance over the past two months:



Though the Nasdaq popped above its 50-day MA in early January, and then again in late January, the 50-day MA has failed to provide support on the pullbacks. If the Nasdaq reclaims its 50-day MA again, will it simply slide back below it a few days later? Perhaps, but this time may be different if the index manages to rally above resistance of its five-month downtrend line, which is shown on the longer-term weekly chart below:



Regardless of whether or not the Nasdaq breaks out from here, the Dow Jones Industrial Average may continue to weigh on the performance of the broad market (as analyzed in yesterday's commentary). As such, sectors related to the Nasdaq are probably a safer buy than anything related to the Dow or S&P. Of these, we would focus on the biotech ETFs (as well as gold/silver commodity ETFs). On the short side, keep an eye on the inversely correlated UltraShort Oil and Gas ProShares (DUG). It is setting up for a possible buy entry above its 50-day MA ($26.16), which would break a multi-month downtrend line as well.

Open ETF positions:

Long - DGP, GDX, IBB, UGA, SRS
Short - (none, but SRS is a bearish position)

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.