Stocks gapped lower on yesterday morning's open, but buyers immediately stepped in and provided support. Strength in the Nasdaq enabled the broad market to subsequently reverse and trend higher throughout the rest of the day. Each of the major indices finished in the plus column and near their intraday highs. After shaking off an opening loss of 0.6%, the Nasdaq Composite closed higher by the same percentage. Like the previous day, both the S&P 500 and Dow Jones Industrial Average showed relative weakness, limiting each index to a gain of only 0.2%. The small-cap Russell 2000 also lagged behind by edging only 0.1% higher, while the S&P Midcap 400 advanced 0.3%.

Turnover in both exchanges was mixed. Total volume in the NYSE declined by 8%, but volume in the Nasdaq was 5% higher than the previous day's level. Despite the previous sessions's "churning" action, the Nasdaq followed up with a confirmed "accumulation day" that was indicative of institutional buying, the first of the new year. Confirming yesterday's broad market price divergence, market internals in the Nasdaq were more positive than the NYSE. In the Nasdaq, advancing volume exceeded declining volume by a healthy margin of nearly 3 to 1. The NYSE ratio, however, was positive by only 1.2 to 1.

Throughout most of last November and December, the Nasdaq showed relative weakness by trading sideways while both the S&P and Dow were posting new highs. But so far in the new year, the opposite is true. Institutional money flow and sector rotation into the technology stocks has already enabled the Nasdaq Composite to post a solid gain of 1.8% since the beginning of 2007, but all the other major indices are still in the red. The S&P 500 remains stuck in the bottom half of a choppy, sideways range that has been in effect since the start of the new year, with its 50-day MA below and 20-day MA overhead. The Nasdaq, however, closed at its highest level of the month and is now within a couple points of breaking out to a new multi-year high. With nine weeks of sideways consolidation, a breakout to a new high could generate a decent amount of upward momentum. Watch for a potential break of the 2,467 to 2,470 area in the coming days:

The Semiconductor Index ($SOX) broke out above the top of its five-day range yesterday, zooming 1.8% higher in the process. The index also closed just a hair above resistance of its prior high of 483 that was set on December 18. If the $SOX manages to firmly break out above that level over the next few days, it will represent the first significant "higher high" since the index entered into a downtrend eight weeks ago. A subsequent "higher low" would confirm a bullish trend reversal. Though it tested key support of its 200-day MA about six times since the beginning of December, the pivotal moving average acted like a springboard that refused to let the $SOX fall below it:

The Semiconductor HOLDR (SMH | news | PowerRating | PR Charts ), which has been stuck in a choppy, sloppy sideways range for the past five months, may finally be poised to break out above resistance of its long-term downtrend that began with the high of exactly one year ago. As you can see on the weekly chart below, SMH closed right at the upper channel of its primary downtrend line:

Prior to yesterday, we had been advocating general avoidance of new positions on both sides of the market. However, with such positive money flow into the tech stocks making itself known, purchases in the Semiconductor, Software, Hardware, or Internet sectors are relatively low risk. We especially like the idea of buying SMH for an intermediate-term trade on a breakout above its weekly downtrend line. Nevertheless, most of the "old economy" sectors that comprise the S&P and Dow have not yet set up for long entry points. The exception is the Securities Broker-Dealer Index ($XBD), which closed at a fresh record high yesterday. Recall from the commentary of a few days ago that the StreetTRACKS Capital Markets (KCE | news | PowerRating | PR Charts ) is probably the best ETF for that sector. Like the $XBD index, KCE also set a new all-time high, but you're still better off focusing new ETF purchases on the tech arena.

Open ETF positions:

Long SDS, MZZ (regular subscribers to The Wagner Daily receive detailed stop and target prices on open positions and detailed setup information on new ETF trade entry prices. Intraday e-mail alerts are also sent as needed.)


Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and financial conferences around the world. For a free trial to the full version of The Wagner Daily or to learn about Deron's other services, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com .