A rebound in the tech arena helped the Nasdaq to snap its three-week losing streak, but institutional buying interest was once again suspiciously absent. The Semiconductor Index ($SOX), which has dropped more than 25% since May 5, finally registered a solid bounce of 3% last Friday and pulled the major indices along with it. The Nasdaq Composite rallied 1.9%, while the S&P 500 and Dow Jones Industrial Average gained 1.2% and 1.1% respectively. The small-cap Russell 2000 advanced 2.1% and the S&P Midcap 400 closed 1.6% higher. Friday's gains also enabled the indices to finish at their highest levels of the week. The Nasdaq turned in a substantial weekly gain of 3.7% and the S&P 500 kept pace with a 3.1% advance.

Looking purely at last week's percentage gains in the market, one would understandably assume that stocks have recently been performing well. However, one major problem is that the market has yet to confirm its gains with higher volume. In Friday's session, total volume in the Nasdaq declined by 14%, while turnover in the NYSE was 7% lighter than the previous day's level. We don't mean to keep harping on it, but the lack of volume on the "up" days should be a primary area of concern for the bulls. Within the past week, there have been two large gains in the broad market. On July 24, the S&P 500 rallied 1.6%, then followed it up with a 1.2% gain on July 28. However, volume declined on both days. This is of paramount importance because the stock market has never reversed from a primary downtrend without first having an "accumulation day," defined by higher prices and higher volume. With institutions accounting for more nearly 75% of the market's average daily volume, rallies simply cannot last if they are driven purely by retail buying.

In the July 28 issue of The Wagner Daily, we mentioned that the $SOX index may be trying to put in a bottom, but it was still below resistance of its primary downtrend line. Its subsequent three percent gain later that day helped confirm our thought about a short-term bottom, but also caused the index to close right at resistance of its downtrend line. Going into today's session, this is one index you want to pay attention to. If the $SOX manages to break out above its multi-month downtrend line, it will undoubtedly force the bears to cover their short positions. In turn, it could lead to a broad-based rally that may finally generate a substantial rise in turnover. Conversely, failure to break out above that downtrend line could just as easily lead to a resumption of the primary trend. Remember that the semiconductor index tends to lead the market in both directions because it is so heavily weighted within the Nasdaq, which usually leads the other indices. The updated chart of the $SOX below shows the close proximity of the index to its primary downtrend line:

Last week, our attention was also focused on key resistance of the 1,280 level in the S&P 500. We mentioned that a breakout above that level would mark the first significant "higher high" in the S&P since the downtrend began on May 10. Since the index closed at 1,278 on Friday, odds are good that we will see a test of that level within the next one to two days. On July 18, the S&P 500 set a "higher low," which was the first step at setting up the index to form a "higher high." The daily chart below illustrates Friday's close just below the 1,280 resistance:

As earnings season begins to wind down, we can look forward to technical patterns being more likely to follow-through. Much of the volatility over the past two weeks has been driven largely by knee-jerk reactions to earnings surprises, but we will soon see the market's real reaction to the raft of earnings that have been released. For now, our bias remains bearish in the intermediate-term, but neutral in the short-term. The major indices remain in a downtrend, plain and simple. Until that changes and is confirmed by higher volume, we have no reason to fight the trend. With last week's attempt at a broad-based breakout, this may not be the best time to initiate new short positions, but we certainly would not aggressively begin buying stocks and ETFs either. If you feel the need to be long the market, focus on sectors such as Pharmaceuticals, Utilities, and Gold/Silver Mining, each of which have been showing decent relative strength. Regular subscribers will see below that we are actually targeting one of the mining ETFs for potential long entry today.

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.