Stocks followed through on Monday's selloff with an opening gap down yesterday morning, but an afternoon recovery enabled the major indices to close modestly higher. The S&P 500, Nasdaq Composite, Russell 2000, and S&P Midcap 400 indices all gained 0.3%. The laggard Dow Jones Industrial Average edged only 0.1% higher. It was positive that the broad market reversed its opening losses, but the gains were minimal considering the extent of the previous day's losses. This was especially true of the Nasdaq and Russell 2000, which suffered declines of 2.2% and 2.6% respectively.

Total volume in both the NYSE and Nasdaq exchanges was 1% lower than the previous day's levels. Though turnover was nearly the same, the absence of higher volume on the "up" day failed to confirm the presence of institutional buying. A strong increase in volume and larger percentage gains would have indicated traders were accumulating stocks beneath the surface, but that wasn't the case. Market internals were mixed, though much improved over the previous session. In the NYSE, advancing volume exceeded declining volume by a margin of 1.7 to 1. A weaker Nasdaq saw its advancing volume on par with declining volume.

In yesterday's newsletter, we mentioned that Monday's break of trendline support in both the S&P and Dow could not be confirmed by only one day of closing prices. Rather, we wanted to see whether or not the S&P and Dow would quickly snap back above their 20-day MAs and prior uptrend lines in yesterday's session. They didn't, but the S&P could still do so today because the index finished right at resistance of its 20-day MA and just below its prior uptrend line. The Dow, however, may be a problem because it is still well below both its 20-MA and prior uptrend line. Here is an updated look at both indices:

Yesterday's opening weakness caused the Nasdaq to test support of its prior uptrend line, but it closed above it, as well as its 20-day MA:

Putting it all together, it seems that divergence between the major indices may be increasing. The Dow is now well below its prior uptrend line and barely bounced yesterday, but the Nasdaq is still within its trend channel. If the stock market shows strength over the next few days, expect the Nasdaq to lead the way higher, especially since the Semiconductor Index ($SOX) is still (barely) holding its recent consolidation. Conversely, the Dow should be a downside leader if the bears from Monday's session return to the scene. When the indices begin to diverge from one another, it often leads to choppy and erratic overall trading conditions. Therefore, make sure your long positions are in sector with relative strength and your short positions have relative weakness. As the market shows its hand and makes its next move in the coming days, we'll be taking a look at which industries are likely to be both the upside and downside leaders in the next phase. For now, our focus is on the broad market because it is hinging on pivotal support levels.

Our open positions are all on the long side, but several are not very correlated to the broad market. We remain long the StreetTRACKS Gold Trust (GLD), which is consolidating at its highs and still acting well. We like that GLD is directly tied to the price movement of the spot gold commodity, not the stock market. We also are long the Oil Service HOLDR (OIH), which is largely, but not fully, driven by changes in the price of crude oil. OIH came close to our stop on Monday, but rallied back to near our entry point yesterday. Our third long position, UltraShort Dow 30 ProShares (DXD), is basically a short position in the Dow. This inversely correlated ETF should do well if the relative weakness in the blue-chips remains. The PowerShares WilderHill Clean Energy (PBW) is our remaining long position.

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.