After beginning the day slightly higher, the major indices meandered in a narrow, sideways range throughout the entire session before finishing in firmly positive territory. The S&P 500 and Nasdaq Composite scored matching gains of 1.2%, as the Dow Jones Industrial Average advanced 0.8%. Leading the way higher were the small-cap Russell 2000 and S&P Midcap 400 indices, which rallied 2.3% and 2.7% respectively. As is frequently the case with lethargic days of consolidation, each of the main stock market indexes closed near the middle of its intraday range.

Total volume in the NYSE declined 6%, while volume in the Nasdaq eased 12% below the previous day's level. Although yesterday's advance occurred on lighter volume, the market's gains were fully the result of the initial opening gap, not an uptrending day. Since the major indices traded sideways and merely digested their recent gains, the lower turnover was not really a big deal. Market internals were modestly positive. In both the NYSE and Nasdaq, advancing volume exceeded declining volume by a margin of approximately 2 to 1.

When the stock market attempted to bounce on numerous occasions throughout September - November of this year, the normal pullbacks that followed failed to find support. Instead, new lows followed shortly thereafter. So far, December has been different. This month, there have been at least four different days when the stock market began selling off intraday, and would have had the perfect excuse for falling off a cliff like it did so many times before, but buyers stepped in to absorb the supply instead. Combined with the bullish pattern of higher volume gains and lower volume losses the market has been exhibiting so far this month, it appears institutions may be stealthily buying the pullbacks to areas of prior price support. Today's broad rally off the afternoon lows was a good example of this. Below, check out the 15-minute intraday chart of the Ultra S&P 500 ProShares (SSO), a popular, leveraged ETF proxy for the benchmark S&P 500 Index:



Notice how a test of the December 9 low, almost to the penny, triggered the late-day recovery that lifted the major indices back into positive territory. Both the Nasdaq and Dow Jones Industrials also reversed after perfectly testing the previous day's lows. An even greater example of institutional buying on pullbacks to support occurred the morning of December 5, after the main stock market indexes fell to test support of their prior short-term lows from December 2. This subsequently sparked the rally that pushed the major indices above their 20-day moving averages:



On an overall technical level, yesterday's session was rather uneventful because it was an "inside day." This means the intraday trading ranges of the major indices was completely enclosed within the previous day's highs and lows. As such, the major indices are still holding above support of their 20-day exponential moving averages and new support of their prior intermediate-term downtrend lines, while resistance of the 50-day moving averages loom overhead. With the 20-day moving averages rising up from below, and the 50-day moving averages pressing down from above, we expect to see the resolution of a range expansion very soon. This compression of the trading range of the past several days is shown on the daily chart of the Dow Jones Industrial Average below:



The big question, of course, is whether the impending breakout of the volatility contraction will be to the upside or downside. The bears could justifiably argue that the 50-day moving average is a major level of resistance the indexes will have trouble overcoming, as well as the fact that the broad market remains firmly in a long-term bear market. Conversely, bulls could argue volume patterns have turned bullish, stocks have been showing resilience on the pullbacks, and the market is still "oversold" in the intermediate-term. A final argument the bulls have in their favor is that the major indices are forming "bull flag" patterns on their short-term hourly charts. Below, we've annotated the "bull flag" on the hourly chart of Ultra Nasdaq 100 ProShares (QLD), a well-known ETF proxy of the tech-heavy Nasdaq 100 Index. Moving averages have been removed so you can more easily see the pattern:



Based purely on the technical facts above, it seems the bulls have the upper hand right now, at least in the short to intermediate-term. However, be careful to avoid "jumping the gun" with aggressive buy entries in the broad market before seeing confirmation the market's next move will be in a northerly direction. On a separate note, the pending outcome of the "big 3 automotive bailout" is one element of indecision that could certainly lead to erratic behavior that messes with otherwise solid-looking technicals.

Open ETF positions:

Long - FXI, INP, SMH
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.