Yesterday was a bullish accumulation day

After several days of indecisive and directionless trading, the major indices trended solidly higher yesterday. Volume picked up a bit as well. The S&P 500 and Dow Jones Industrial Average gained 0.5% and 0.6% respectively, while the Nasdaq Composite rallied 1.0%. The small-cap Russell 2000 advanced 1.1% and the S&P Midcap 400 closed 0.8% higher. A bit of selling pressure in the late afternoon caused stocks to finish off their intraday highs, but the broad market held on to most of its gains. It was also a welcome change that each of the major indices keep pace with one another, as none of the indices lagged significantly behind.

Turnover was higher in both exchanges yesterday, causing both the S&P 500 and Nasdaq Composite to register bullish "accumulation days." Total volume in the NYSE increased by 10%, while volume in the Nasdaq was 7% higher than the previous day's level. Unfortunately, volume levels still came in below average, but the broad-based gains on higher volume is a good start. Market internals were firmly positive as well. In the Nasdaq, advancing volume exceeded declining volume by a margin of more than 4 to 1. The NYSE spread was positive by nearly 5 to 2.

We've been focused extensively on the performance of the Semiconductor Index ($SOX) recent days because the sector tends to lead the Nasdaq, and hence the broad market. However, one tech-related sector that has been showing more relative strength and a better chart pattern than the $SOX is the Software Index ($GSO). When the broad market correction began in May, both sectors sold off sharply, but the $GSO found support in mid-June. The $SOX, however, continued lower. In the beginning of July, the $GSO began trending lower again, but the index held its prior low from the previous month and formed a double bottom. Meanwhile, the $SOX fell another ten percent below its June low. Presently, the $SOX remains more than 20% below its 52-week high, but the $GSO is only off by 6%. Since forming its double bottom last month, the $GSO has moved steadily higher and closed yesterday back above resistance of its 200-day moving average. If the index clears its August 18 high, there is a decent chance the $GSO will recover all the way back to at least test its 52-week high that was set in April of this year. Looking at the daily chart of the $GSO below, notice the nice consolidation that is occurring just above the 200-day moving average:

When comparing one sector, stock, or ETF to another, we like to use overlay charts that compare the percentage price changes. These are line charts that don't show any actual prices, but instead show only a comparison of how much an instrument has moved up or down, relative to another, within a given period of time. If you overlay the $SOX with the $GSO, you will quickly spot the relative strength the $GSO has been exhibiting. Since May 1, the $GSO index has lost 3.9%, but the $SOX has fallen more than 14% during the same period:

If volume returns and the market breaks out, the Software sector will probably be one of the better performing sectors. As the ETF Roundup shows, there are three ETFs that are comprised of software stocks: iShares Software (IGV | Quote | Chart | News | PowerRating), Software HOLDR (SWH | Quote | Chart | News | PowerRating), and the PowerShares Dynamic Software (PSJ | Quote | Chart | News | PowerRating). All currently have similar chart patterns.

Going into today, traders will likely remain on the sidelines ahead of the minutes from the Federal Reserve Board's August 8 monetary-policy meeting. Scheduled to be released at 2:00 pm EDT, the minutes are likely to generate volatility in the market. The S&P 500, Dow Jones, and Nasdaq Composite each closed right below their respective highs of their recent consolidations, so they could breakout from here. However, just remember that light volume in the market often results in false moves in both directions. We continue to recommend laying low until after the Labor Day holiday has passed.

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.