Follow-through momentum from the previous day's massive rally caused stocks to gap higher yesterday morning, though they subsequently drifted sideways to lower throughout the day. By early afternoon, several of the major indices had nearly filled their opening gaps, but buying interest in the final ninety minutes of trading lifted stocks off their lows and enabled the broad market to finish with solid gains. The Nasdaq Composite, S&P 500, and Dow Jones Industrial Average all posted identical 0.6% gains. Small caps remained on a tear, as the Russell 2000 tacked on another 1.3% gain to the prior day's 4.0% advance. The S&P Midcap 400 moved 0.5% higher. All of the main stock market indexes finished just below the middle of their intraday ranges.

Turnover in the Nasdaq rose 4% above the previous day's level, enabling the index to score its second straight "accumulation day." Total volume in the NYSE was increased by less than 1%. The slightly higher volume in the Nasdaq was finally enough for trading to exceed its 50-day average level yesterday. Volume in the NYSE remained above average for the second straight day, though not by a wide margin. Nevertheless, it's nice to see the return of higher turnover, as trends are typically smoother and steadier when supported by decent institutional volume. In both exchanges, advancing volume exceeded declining volume by approximately 2 to 1 (slightly lower in the Nasdaq).

On an intraday level, yesterday's action in the S&P 500 futures offered a good example of how the previous day's highs usually act as support. This is illustrated on the 15-minute intraday chart of the E-mini S&P 500 (ESZ07):



Notice how buyers stepped in immediately after the S&P futures neared support of the previous day's high. This also coincided with a time of day in which many intraday reversals occur, around 2:30 pm ET. Whenever unsure of whether or not to close a position, it is often best to wait and assess the price action after the 2:30 pm reversal period. Because of Tuesday's highs acting as support, yesterday's lows in the major indices are now the micro short-term support levels going into today's session. Of course, considering the monstrous gains that the market registered on Tuesday, it would still be perfectly acceptable for the major indices to even retrace a bit of that day's range. The prior highs from September 4 are a much more significant support level than yesterday's lows.

Looking at the daily chart of the S&P 500, notice that yesterday's high coincided with an area of horizontal price resistance at the 1,540 level:



Though the 1,540 level is still below the actual 52-week high, it acted as an area of significant resistance on several occasions in June. It may do the same again this month. If the S&P does manage to clear the 1,540 resistance, expect further resistance at the 52-week high of 1,555.

Over the next one to two weeks, the most positive thing the stock market could do is simply consolidate in a tight, sideways range. Such action would enable the 10 and 20-day moving averages to rise up to meet the current price and provide support. Further rally attempts without first having a period to digest recent gains will increase the risk of the gains being unsustainable. The overall short-term technical view remains bullish, while we're basically neutral on the intermediate-term.

Open ETF positions:

Long - OIH, IBB, PBW, LQD
Short - (none)

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.