For the first time in weeks, stocks demonstrated bullish intraday trading action by gapping lower on the open, but reversing to close in positive territory. Just as they led the market lower throughout the downtrend, small caps also led the market higher in sync with yesterday's uptrend. The Russell 2000 Index advanced 1.1%, while both the Nasdaq Composite and S&P Midcap 400 indices gained 0.7%. The Dow Jones Industrial Average rallied 0.4%, but the S&P 500 showed relative weakness for a change and only gained 0.1%. A bit of weakness in the final thirty minutes of trading caused the major indices to finish off their highs, but still within the upper third of their respective intraday ranges.

Turnover rose in both exchanges for the second consecutive day, indicating a gradually increasing buying interest by institutional traders. Total volume in both the NYSE and Nasdaq came in 3% higher than the previous day's levels. Volume in the NYSE came in just above its 50-day average level, but the Nasdaq turnover level was lighter than average, despite the "accumulation day." Once again, advancing volume only marginally exceeded declining volume in both exchanges. Higher volume on an "up" day is a good start, but it would be nice to see volume levels exceed their 50-day moving averages.

Leading stocks acted better today, a positive sign for the overall market, but the biggest technical problem facing the market continues to be the S&P 500's resistance at the 1,280 level. This area of resistance, which we annotated in yesterday's Wagner Daily, stopped the rally dead in its tracks today. As the daily chart below illustrates, the S&P 500 briefly probed above the 1,280 level on an intraday basis, but failed to close above it. Again, this remains the pivotal area of resistance on the S&P as we enter the new month:

One of the biggest factors behind yesterday's market strength was the 1.5% gain in the Semiconductor Index ($SOX). The $SOX had been lagging for many months, but yesterday's strength pushed the sector above primary resistance of its downtrend line:

Obviously, it would be very bullish for the broad market if the $SOX holds above its 50-day MA. However, take it easy with new long positions until the S&P 500 also confirms the breakout above the 1,280 level. Just as many false breakdowns cause a lot of pain to the bears in a strong market, there are an equal number of false breakouts that occur in downtrending markets and often result in loss of capital for the bulls. We are presently focused on managing our existing positions for maximum profitability rather than entering new ones.

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.