Stocks finally showed a bit of resilience yesterday, as the major indices built on Wednesday's strong gains. Bullish momentum carried the stock market to a higher open in the morning, but a healthy pullback quickly caused stocks to surrender early gains. Buyers were undeterred, however, and pushed the major indices back towards their morning highs later in the afternoon. The S&P 500 and Nasdaq Composite scored identical gains of 1.2%, as the blue-chip Dow Jones Industrial Average cruised 1.9% higher. Both the small-cap Russell 2000 and S&P Midcap 400 indices climbed 1.4%. All the main stock market indexes finished at or just below their best levels of the day.

Perhaps the best thing about yesterday's session was that higher turnover matched the solid gains. Total volume in the NYSE increased 14% above the previous day's level, while volume in the Nasdaq ticked 10% higher. The market's gains on higher volume enabled both the S&P 500 and Nasdaq Composite to register a bullish "accumulation day," indicative of buying by mutual funds, hedge funds, and pension funds. When a market is attempting to recover from a persistent downtrend, such institutional accumulation is necessary in order to absorb the vast amount of overhead supply left in the wake of the preceding sell-off. Market internals were firm. Advancing volume in the NYSE exceeded declining volume by a margin of 5 to 2. The Nasdaq adv/dec volume ratio was similarly positive by a ratio of 3 to 1.

Over the past week, we've been discussing ETFs with the most relative strength or weakness to the broad market, rather than the technical state of the main stock market indexes. Because the broad market was in such a persistent downtrend, there wasn't much of a point to analyzing projected reversal levels until stocks at least caught a bid. But now that we're in rally mode, at least in the near-term, let's take a look at how far this counter-trend bounce (that's all it really is for now) may carry the benchmark S&P 500 Index:



Whenever a sharply trending index, stock, or ETF enters into a counter-trend bounce, the 10-day moving average is the first line of defense that will act as minor resistance (in counter-trend bounces of downtrending markets) or support (in counter-trend pullbacks of uptrending markets). On the chart above, the 10-day moving average (MA) is represented by the dashed purple line. Notice that yesterday was the first time since June 5 that the S&P 500 managed to close above its 10-day MA. All preceding touches of the 10-day MA quickly led to a sell-off and resumption of the primary downtrend. As such, the S&P 500's ability to convincingly close well above its 10-day MA (currently at 1,247) at least hints at a change of character in the general behavior of the stock market.

The next resistance level the S&P 500 will soon encounter is the 20-day exponential moving average (EMA). This is indicated as the beige line, currently at the 1,273 level. The 20-day EMA is more difficult for a steadily trending market to overcome during a counter-trend retracement than the 10-day MA. However, because the May - July downtrend was so intense, a bounce to the 20-day MA does not even represent a 38.2% Fibonacci retracement for the S&P 500. As such, pure momentum of the current rally should at least enable the S&P 500 to test its 20-day MA sometime next week. If you happened to scoop up a few long positions near the lows, a test of the 20-day EMA in the S&P 500 may be a good place to take your profits, or perhaps tighten protective stops to lock in gains.

Although the 20-day EMA may provide a decent amount of price resistance to the S&P 500, we would advise against initiating new broad-based short positions at that level until the market provides some sort of reliable indicator that the downtrend will resume. We feel the current bounce has the ability to carry the major indices to at least a 50% retracement of the losses from their May highs to July lows. There's a good chance the main stock market indexes may rally all the way back to test pivotal resistance of their 50-day MAs, which are currently just above the 50% retracement levels. However, since all the 50-day MAs are now descending, they may actually fall to meet the 50% retracement levels by the time stocks muster up enough strength to bounce that far.

After yesterday's close, market-moving companies Google, Microsoft, and Merrill Lynch all reported quarterly earnings results that disappointed Wall Street, sending their shares sharply lower in after-hours trading. Not surprisingly, the S&P and Nasdaq futures markets also tumbled alongside of those individual stocks, both falling more than 1% from where they were trading at 4:00 pm ET. The good news, however, is that the latest earnings report of banking giant Citigroup, announced earlier this morning, triggered a reversal that sent the S&P and Nasdaq futures markets back towards yesterday's highs. If the major indices manage to brush off last night's negative earnings reports and close near unchanged levels today, it will be another sign that overall sentiment has flipped to the bullish side, at least in the near-term.

Open ETF positions:

Long - BBH, GLD, RSX
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.