The stock market followed through on Tuesday's bullish reversal by posting a round of solid gains on higher volume yesterday. Both the S&P 500 and Nasdaq Composite rallied 0.7%, while the Dow Jones Industrial Average gained 0.8%. Small caps perked up, enabling the Russell 2000 Index to advance 1.2%. The S&P Midcap 400 was 0.9% higher. Each of the major indices finished near their intraday highs, though the Nasdaq Composite displayed relative weakness in its intraday chart pattern. The S&P and Dow closed firmly above their respective morning highs, but the Nasdaq barely exceeded resistance of its morning high. Bearish divergence in the Nasdaq has been the situation for the past several weeks.

The most positive thing about yesterday's session is that the gains occurred on higher volume, but turnover in both exchanges was still well below average levels. In the NYSE, total volume was 23% higher than the previous day's level. The Nasdaq volume similarly increased by 19%. Although the gains on higher volume technically caused both the S&P and Nasdaq to register bullish "accumulation days," volume in both exchanges was still approximately 35% lighter than 50-day average levels. With institutions remaining largely on the sidelines, don't get too excited about price movements in either direction during this holiday week. Again, we will know the true intentions of which way the mutual funds, hedge funds, and other institutional traders want to take the market after New Year's Day has passed.

Although we are already showing a profit with our long position in the StreetTRACKS Gold Trust (GLD), the Market Vectors Gold Miners (GDX) is also setting up for a potential long entry. While GLD mirrors the price of the spot gold commodity, GDX is tied to the price movement of a basket of individual gold mining stocks. As you may recall, we bought GLD on December 19 when it corrected down to triple convergence of support of its primary uptrend line, 50-day MA, and 200-day MA. So far, its primary uptrend remains intact. The price of spot gold obviously affects the price of the mining stocks, but the two do not necessarily move in sync with one another all the time. GDX bounced off support of its 50-day MA two days ago, and closed yesterday right at resistance of its three-week downtrend line. If GDX rallies above yesterday's high, it should resume its primary uptrend that began with the low of October 5. This is illustrated on the chart below:

Curiously, we continue to see a clear divergence between the relative strength in the blue chip Dow Jones Industrial Average and the tech-heavy Nasdaq Composite Index. Yesterday, the Dow actually closed at a fresh six-year high, but the Nasdaq merely ran into resistance of its 20-day moving average and finished in the middle of a six-week sideways range. Further, the Dow only corrected down to support of its 20-day MA, but the Nasdaq dipped below its 50-day MA. Looking at the daily charts below, notice how the Dow has no overhead supply to contend with. The Nasdaq, however, could easily roll back over to test its 50-day MA and December 26 low:

Although not shown, the S&P 500 has a similar chart pattern as the Dow. The S&P only corrected down to its 20-day MA and nearly closed at a new high yesterday as well. When the major indices are showing such divergent patterns, it indicates the presence of a tug-of-war between the bulls and bears that typically leads to indecisive and choppy overall conditions. While it's certainly possible for the S&P and Dow to continue rallying with the Nasdaq lagging behind, rallies driven by such leadership are usually short-lived. Soon, we should see the resolution of either the Nasdaq catching up and moving to new highs, or the S&P and Dow correcting down to the vicinity of the Nasdaq. A healthy Nasdaq is necessary in order to confirm the strength in the S&P and Dow, so traders will be watching the coming week closely to see which scenario occurs first.

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.