2 ETFs that look set to rally

Stocks scored an impressive round of gains Thursday, as the major indices followed up on the previous session's reversal attempt. For the first time since June 1, the broad market trended steadily higher throughout the entire day and finished at its intraday high. The S&P 500 [SPXSPX] leapt 2.1%, the Nasdaq (COMP | Quote | Chart | News | PowerRating) 2.8%, and the Dow Jones Industrial Average (DJX | Quote | Chart | News | PowerRating) 1.8%. The small-cap Russell 2000 showed relative strength for a change, surging 3.5% higher. The S&P Midcap 400 Index similarly posted a gain of 3.2%.

Total volume in the Nasdaq increased by 7%, but turnover in the NYSE was about the same as the previous day's level. Considering the large percentage gains in the market, one might have expected a more significant increase in volume, but at least the Nasdaq registered a bullish "accumulation day." Despite mixed volume levels, incredibly strong internals confirmed the market was "looking good under the hood." In the NYSE, advancing volume blew away declining volume by a ratio of 21 to 1! No, that's not a typo. The Nasdaq ratio was positive by more than 14 to 1.

As the lack of declining volume indicated, yesterday's session was clearly a broad-based relief rally. Every industry sector we follow closed higher, but the biggest gainers were those that fell the most during the market's selloff. Oil, gold, and metals, each of which have fallen sharply over the past six weeks, all rallied sharply. However, the stocks and sectors with the most bullish chart patterns lacked momentum. This tells us that the market's rally was largely driven by short covering rather than heavy institutional accumulation of positions. Nevertheless, this is not to say that yesterday's action was insignificant.

As regular subscribers are aware, we entered a new long position in the Telecom HOLDR (TTH | Quote | Chart | News | PowerRating) yesterday. Rather than chasing the one-day bounce on sectors with bearish chart patterns, we focused on sector ETFs that have been showing relative strength throughout the market's selloff. TTH had been consolidating right below its 50-day moving average for the past two weeks and finally broke out above it yesterday. The breakout resulted in TTH closing at its highest price since April 10. Setting a new 2-month high would normally be unimpressive, but it means a lot in the current market because a vast majority of the sectors are still trading well below their May highs. Below is a chart of TTH:

Because TTH broke out above horizontal price resistance, we now expect it to test its 52-week high that was set in March. With a little bit of help from the broad market, it should break out to a fresh high as well.

In yesterday's Wagner Daily, we illustrated the levels at which the broad-based ETFs were going to find resistance of their downtrend lines. As you might have noticed, each of them closed right below those downtrend lines. Therefore, the next few days will be interesting. Either the downtrends that have been intact for six weeks will resume or the major indices will break out above those downtrend lines, which would generate further upside momentum. If the downtrends resume, we would likely see the major indices fall back down to test this week's lows, a scenario that could result in the formation of double bottoms. Until the market proves otherwise, we must assume the current downtrend will remain in place. As such, you might consider selling any long positions into strength until stocks prove they can retain their gains for more than a day or two.