Reversing the previous day's precipitous drop in a surprisingly convincing fashion, stocks roared back to life yesterday. Throughout the first half of the day, the major indices chopped around in the lower half of the prior day's trading ranges, nearly falling into negative territory just before mid-day. But the bulls aggressively took control in the final two hours of trading, powering stocks forcefully enough to wipe out most of the Inauguration Day losses. The Nasdaq Composite rose 4.6%, the S&P 500 4.4%, and the Dow Jones Industrial Average 3.5%. The small-cap Russell 2000 zoomed 5.3% higher, as the S&P Midcap 400 climbed 4.6%. Opposite of the previous session, all the main stock market indexes closed at their intraday highs.

Turnover picked up across the board, enabling both the S&P 500 and Nasdaq to score a bullish "accumulation day." Total volume in the NYSE increased 9%, while volume in the Nasdaq ticked 5% above the previous day's level. Since the S&P 500 suffered a "distribution day" by selling off on higher volume in the preceding session, it's even more positive that higher volume accompanied yesterday's gains. This tells us mutual funds, hedge funds, and other market-moving institutions were supporting yesterday's strong afternoon price action. We monitor the daily price to volume relationship of the S&P and Nasdaq because well over half of the stock market's average daily volume is the result of institutional trading. Rallies without institutional accumulation are short-lived, just as sell-offs not initially driven by institutional distribution can reverse quickly.

It's been a wild ride over the past four days. On January 15, after briefly dipping below support of their late December lows, the major indices formed bullish reversal days that hinted at a short-term bounce. The following day, stocks sold off in the morning, but showed resilience by rallying to close slightly higher. But on January 20, Inauguration Day, the main stock market indexes fell apart, plummeting an average of more than 5% and breaking support of their January 15 lows as well. Then, as if that sharp sell-off never happened, stocks raced higher to recover most of those losses yesterday afternoon. Clearly, there is quite a bit of indecision in the market right now; the bulls and bears seem to be engaged in a round of tug-of-war.

Given the current lack of direction in the market, what's an astute, disciplined swing trader to do? Easy! Wait on the sidelines while others battle it out. Remember, the most successful traders we know are out of the markets more than they're in the markets. In our opinion, right now is one of those times to be out of the markets, or at least in ETFs with a low correlation (such as gold).

If the major indices attempt to move higher in the short-term, there is an abundance of overhead supply to contend with, as well as resistance of their 20 and 50-day moving averages. Conversely, substantial support should now be found at the "swing lows" of January 20. This all adds up to the potential for continued choppiness and erratic movements in the market. It's impossible to determine how long the main stock market indexes will remain in their short-term, range-bound patterns, but the overall investor reactions to the slew of corporate earnings reports on tap will likely determine the direction of the market's next move. Regardless, there will be plenty of time to take advantage of profitable opportunities after the market eventually shows its hand. To reiterate our closing thoughts from yesterday's commentary, ". . .we're in no hurry to catch every little gyration and jiggle in the stock market.In both the short and intermediate-term, we basically have a neutral view, as there are technical factors that could cause stocks to swing in either direction. We plan to wait for the next definitive move up or down before getting more aggressive with a plethora of new positions. In the meantime, cash is king and capital preservation rules!"

Open ETF positions:

Long - DGP, GDX
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.