Stocks recovered from their morning losses yesterday afternoon, but the rally lacked the power and breadth that is normally associated with bullish reversal days. The Nasdaq Composite, down 0.9% at its mid-day low, reversed to finish the session less than 0.1% lower. Both the S&P 500 and Dow Jones Industrial Average made it into positive territory and closed with 0.2% gains. The small-cap Russell 2000 and S&P Midcap 400 indices each managed a 0.1% advance. Our SPY short position hit its trailing stop when it rallied above the morning high, but we still locked in a gain of approximately one point.

Total volume in the NYSE increased by 6%, while volume in the Nasdaq was 10% higher than the previous day's level. The gains on higher volume technically caused the S&P to register a bullish "accumulation day," but calling it as such is a bit deceiving. The one major problem with yesterday's broad market volume pattern is that turnover actually decreased when the broad market began to rally in the afternoon. When the major indices were near their intraday lows at 12 noon, volume in the NYSE was 11% higher than the prior day at the same time. Then, as stocks began to rally, volume actually declined, causing total volume to rise only 6% by day's end. In the Nasdaq, volume was 14% higher at its mid-day low, then eased up until turnover finished only 10% higher than the previous day. So even though higher volume matched the S&P and Dow's gains, a closer look shows that volume during the morning selloff was higher than it was in the afternoon rally. Obviously, this is not a positive for the markets. Mediocre market internals confirmed the lack of power in the afternoon reversal. In the NYSE, advancing volume roughly equaled declining volume, while the ratio was slightly negative in the Nasdaq.

In addition to a lack of power in the volume department, many leading stocks continued to fall further, despite the reversal attempt in the broad market. The Biotech Index ($BTK) and Pharmaceutical Index ($DRG) were among the bright spots in yesterday's sector performance, but the formerly strong Semiconductor Index ($SOX) shed another 0.6%. As we recently warned of, GLD (Gold Trust) gapped down and sold off below support of its five-month uptrend line and 50-day moving average yesterday:

So far, a "lower high" has been established in GLD, but we do not yet have a "lower low." Therefore, we do not advise shorting GLD, but only point this out as a heads-up that you should probably be out of GLD by now. If you still feel gold is going higher, no problem. Just wait for GLD to form a base of support and then buy the first breakout above the range of the consolidation. Managing it this way is much safer than waiting and hoping it will recover soon. It also frees up capital that you can put to work in other issues.

Yesterday's action was typical of how the major indices usually act near key pivot points in the market. Because the S&P 500 had closed the previous day right at its 50-day moving average, we saw a bit of fear that resulted in a rapid drop when it looked like the index was not going to hold above its 50-MA yesterday morning. However, the bulls were waiting for that typical probe below the 50-MA so that they could place their buy orders and run up the market in the afternoon. But the only problem is that there was not much pressure behind the afternoon buying. Nevertheless, the S&P 500 managed to bounce off and close above its 50-day MA yesterday. Unfortunately, the market-leading S&P Midcap 400 Index remains below both its 50-MA and new resistance of its prior uptrend line that it fell below on March 7:

It is this relative weakness in the mid-cap, as well as the small-caps, that we feel will continue to be a major drag on the broad market. As discussed yesterday, we view the bounce in MDY (S&P Midcap 400) as an opportunity to sell short into strength. Only a recovery back above the March 7 high changes that view. Conversely, the Dow continues to show the most relative strength, but it is always a better bet to follow the path of least resistance which, for now, appears to be lower.

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.