Small and mid-cap stocks followed up on Wednesday afternoon's rally with a session of solid gains yesterday, but negative divergence in the Nasdaq indices limited the stock market's gains. The small-cap Russell 2000 and S&P Midcap 400 indices both rallied 0.9%, while the S&P 500 and Dow Jones Industrial Average advanced 0.5% and 0.4% respectively. The Nasdaq Composite, however, lagged behind with a gain of only 0.2%. The tech-dominated Nasdaq 100 Index actually lost 0.1%. Most of the major indices closed near their intraday highs, but both of the Nasdaq indices closed in the bottom half of their ranges. The S&P and Dow both finished at new six-year highs, as the Russell and S&P Midcap indices posted new record highs.

Total volume in both the NYSE and Nasdaq declined by 2%, preventing both exchanges from registering "accumulation days." Still, overall turnover was above average levels. Mixed market internals confirmed the divergence between the S&P and Nasdaq. Advancing volume in the NYSE exceeded declining volume by a margin of 3 to 1, while the Nasdaq ratio was fractionally negative.

In the January 31 issue of The Wagner Daily, we illustrated how the Pharmaceutical HOLDR (PPH) was setting up for a potential long entry above its two-week downtrend line. As anticipated, it popped above its downtrend line that day, then followed up with another rally yesterday. Going into today, PPH is likely to test resistance of its prior high from January 19. If you're a short-term momentum trader, consider selling into strength and taking the quick profit if it does. Otherwise, you may need to wait through a period of consolidation before it breaks out to a new 52-week high. The dashed horizontal line on the chart below marks resistance of the January 19 high:



One ETF that has come on to our radar screen for potential long entry is the CurrencyShares Euro Trust (FXE). On November 22, FXE gapped up to close at a fresh record high, then trended steadily higher for two weeks. Because the rally was so driven by overnight opening gaps, we failed to find a low-risk entry point on the initial breakout. However, since then, we've been waiting for a suitable entry on the first substantial correction. Last month, FXE pulled back to support of the breakout level, and is now setting up to break out above resistance of its two-month downtrend line. The dashed horizontal line on the weekly chart below illustrates support of the breakout level, while the descending red line marks the two-month downtrend line. As of now, the ideal entry point is above the January 31 high of $131:



With the broad-based indices that are now trading at new highs, there is a lack of overhead supply to contend with. As such, it will not take a lot of buying pressure to push the market higher. However, the Nasdaq Composite still remains an area of concern because it is having difficulty breaking out above resistance at the 2,470 level that we illustrated yesterday. Things are starting to look more positive overall, but we see no reason to be overly aggressive until the Nasdaq gets in gear.

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.