Follow-through momentum on the heels of Wednesday's late-day rally caused stocks to gap higher on yesterday's open, but they subsequently drifted in a choppy, sideways range throughout the rest of the session. The Nasdaq Composite gained 0.8%, the Dow Jones Industrial Average 0.6%, and the S&P 500 0.5%. The small-cap Russell 2000 and S&P Midcap 400 indices were higher by 0.7% and 0.5% respectively. Although yesterday's gains were substantial, fully all of the advance was the result of the broad market's opening gap. As such, it was challenging to profit from yesterday's action unless positions were acquired during Wednesday's bullish reversal and held overnight.

Total volume in the NYSE declined 13% below the previous day's level. The Nasdaq's volume was flat. Considering that both exchanges posted bearish "distribution days" in the previous session, it would have been better if increasing volume had accompanied yesterday's gains as well. Market internals were positive, but not by a wide margin. Advancing volume in the NYSE exceeded declining volume by a little more than 3 to 2. The Nasdaq ratio was positive by 5 to 2.

For the second consecutive day, the Gold and Silver Index ($XAU) was the top-performing sector on our daily watchlist. The index vaulted another 2.4% yesterday, bringing its two-day gain to 6.1%. The strength in gold and silver mining stocks enabled our long position in the Market Vectors Gold Miners ETF (GDX) to close at a fresh all-time high. After nearly a year of trading in a sideways range, GDX is finally on its way to breaking out to new highs. Its increasing volume over the past two weeks is also positive. Below is the weekly chart of GDX:



As was the case when we bought our initial position of GDX on July 10, the price gain in the actual spot gold commodity (and GLD) continues to lag behind the performance of the gold mining stocks (and GDX). Since bottoming on June 26, GDX has gained 16.1%. This compares favorably to a gain of only 5.3% in GLD. Sometimes the price of spot gold leads the mining stocks, while other times the mining stocks show relative strength to spot gold. Because the latter scenario has been the case for weeks, we continue to recommend long entries in GDX over GLD.

Another ETF that broke out of a lengthy base of consolidation was the Software HOLDR (SWH). Gapping and rallying 2.6%, it closed yesterday at a new 5-year high. Its breakout is shown on the weekly chart below:



If trading SWH, be aware that it is comprised of only 13 underlying stocks. Such a narrow diversification means that even small moves in a few of its heaviest weighted stocks may have a greater than expected affect on the price of SWH. A large part of yesterday's breakout, for example, can be attributed to the 6.9% gain in Sap (SAP). SAP presently holds a 21% weighting in SWH, so its price is obviously going to have a big impact on the price of SWH. Microsoft (MSFT), which reported earnings after yesterday's close, has a similar 22% weighting.

Earnings season is again wreaking havoc on the stock market's volatility. After the close of trading yesterday, Internet giant Google (GOOG) reported lower than expected sales in its latest quarter. The news sent the stock about 8% lower in the after-hours market, dragging down a diverse mix of other tech stocks as well. Just two days ago, the Nasdaq's after-hours session reeled from the unimpressive earnings results of both Intel (INTC) and Yahoo! (YHOO). The negativity led to sharp intraday losses the following morning, though stocks recovered much of their losses into the close. As for today, it looks as though we may be headed for a repeat of how Tuesday's after-hours weakness carried into Wednesday morning. Whether the outcome becomes the same is anybody's guess, but one can certainly bet on high volatility either way. Next week will be very busy on the earnings front, so stay alert and prepared for shocks to the system. If the overall negative start to earnings season is any indication, the market could be in for a wild ride! Above all, remember to trade what you see, not what you think!

Open ETF positions:

Long - GDX, INP, PBW, FXC, IBB
Short - RKH

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.