Morpheus Tradin...'s  Instablog

Stocks posted solid gains on Tuesday as trade surged. All five major indices closed near session highs. The S&P MidCap 400 led the advance as it tacked on 1.0% yesterday. The Dow Jones Industrial Average and the S&P 500 added 0.9% on the day while both the small-cap Russell 2000 and the Nasdaq traded 0.8% higher at the close. The broad market appears ready to set new highs.

Market internals were bullish yesterday. Volume spiked across the board. Turnover improved by 40% on the Nasdaq and 28% on the NYSE. The advancing volume to declining volume ratio confirmed the bullishness of the rally. The day ended with the ratio at 2.3 to 1 on the NYSE and 2.4 to 1 on the Nasdaq. Institutions were actively involved in what was clearly an accumulation day on Wall Street.

Given that the market is on the cusp of breaking to new highs a review of the DJIA, S&P 500 and Nasdaq is warranted. In recent weeks, the Dow Jones Industrial Average has played the leadership role among the three largest indices. As of the close of business yesterday, the DJIA was the only one of the three indices to definitively set a new 52 week high. A review of the monthly time frame often helps clarify the "big picture" in the broad market. Below are monthly charts of all three indices.

The iShares Dow Jones Oil & Gas ETF (IEO) undercut both the 20-day EMA and 50-day MA on April 25th before forming a reversal candle. Yesterday this ETF experienced a false breakout on very light volume. A move back above yesterday's high of $72.61 offers a potential buy trigger for IEO. We are placing IEO on the watchlist. Trade details are available to our subscribers in the watchlist section of the newsletter.

Since the Nasdaq is well established as a leading market indicator, we would prefer to see the tech rich index take the leadership role. Further, the S&P 500 is a much better indicator of broad market health. The Dow often takes the leadership role in the late stages of a market rally and we are of the opinion that caution is warranted until the S&P 500 and the Nasdaq confirm the move higher. Still, we are generally bullish on the market at this time. Over the next several days we will be watching carefully for confirmation from the other two indices.