As anticipated, volume dropped ahead of Wednesday's Independence Day holiday, but it wasn't a flat session. The second half of 2007 got off to a strong start, as each of the major indices posted strong gains. Both the S&P 500 and Nasdaq Composite rallied 1.1%, while the Dow Jones Industrial Average ticked 0.9% higher. The small-cap Russell 2000 and S&P Midcap 400 indices were higher by 1.4% and 1.3% respectively. Nearly all of the market's gains occurred in the first hour of trading. Stocks subsequently traded in a narrow, sideways range before finishing near their intraday highs.

The only negative of yesterday's solid results was the lack of institutional buying support. Total volume in the NYSE receded 17%, while volume in the Nasdaq came in 15% below the previous day's level. Volume in both exchanges was well below average levels. A decent surge in turnover would have confirmed the bullish advance, but it's not surprising that trading was light ahead of today's shortened session and tomorrow's holiday. Market internals in the S&P and Dow were the strongest we've seen in a while. Advancing volume in the NYSE exceeded declining volume by a margin of more than 5 to 1. The Nasdaq ratio was positive by 5 to 2.

In yesterday's commentary, we said that "If the Nasdaq manages to leap to a new closing high this week, above the 2,626 level, it will probably pull the discombobulated S&P back above its 50-day MA." That's exactly what happened yesterday. The Nasdaq Composite's close of 2,632 was still below the intraday high of June 20, but it marked a fresh multi-year closing high. After five straight failed attempts to do so, the S&P closed back above its 50-day MA. Still, the index remains 1.3% below its high, so we're not "out of the woods" yet. As we've been saying nearly every day for the past several weeks, the best and lowest risk buying opportunities clearly remain in the Nasdaq.

With the market closing three hours early today, there probably won't be much happening beyond the first hour. Therefore, we'll wait until Thursday, after the holiday has passed, to re-assess which industry sectors are showing the best chart patterns and relative strength. In the meantime, let's keep an eye on the S&P to make sure it holds above its 50-day MA for more than a day. The Nasdaq 100 Index Tracking Stock (QQQQ) may be in play on the long side if its breakout holds into Thursday's session.

NOTE: The stock markets will close early, at 1:00 pm EDT on Tuesday, July 3. On Wednesday, July 4, the markets will be closed the full day. As such, The Wagner Daily will not be published on July 4. Regular publication will resume on Thursday, July 5. Enjoy the holiday with your friends and family!

Open ETF positions:

Long - (none)
Short - EWO, KCE, XLE

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.