Stocks posted a solid session of gains yesterday, but the light volume once again lacked the power of institutional accumulation. The S&P 500 advanced 1.1% and the Dow Jones Industrial Average rallied 1.0%, but relative weakness in the semiconductor sector caused the Nasdaq Composite to lag slightly behind with a 0.9% gain. The small-cap Russell 2000 and S&P Midcap 400 indices both closed 1.1% higher. Both the S&P and Dow closed near their intraday highs, while the Nasdaq finished just above the middle of its intraday range.

Although yesterday's gains were impressive, it was the same old story of lighter volume "up" days that we have been seeing since the broad market's downtrend began on February 27. Total volume in the NYSE fell 30%, while volume in the Nasdaq was 19% lighter than the previous day's level. Granted, the previous session's volume swelled more than usual due to the "quadruple witching" expiration of options. However, yesterday's turnover was still well below average levels. Both exchanges registered their second lowest volume days of the calendar year. Since the February sell-off began, the S&P and Nasdaq have each had only one day of higher volume gains. Conversely, many of the "down" days continue to coincide with higher volume. Last Friday was the most recent such "distribution day." Until stocks begin to see signs of institutional buying, we just can't trust the market's current rally attempt off the March lows. Market internals were quite positive in the NYSE, but not too strong in the Nasdaq. Advancing volume in the NYSE exceeded declining volume by a margin of more than 5 to 1, but the Nasdaq ratio was only positive by 3 to 2.

In yesterday's newsletter, we illustrated how the relative strength in the Oil Service Index ($OSX) should enable the sector to break out on any further strength in the market. Sure enough, that is exactly what happened. Of all the major industry sectors we follow, the $OSX scored the biggest gain yesterday, surging 2.8% higher:



Because higher volume has not yet confirmed the market's rally off the March lows, we are not very confident the $OSX will go much higher in the short-term. Nevertheless, yesterday's breakout was a good educational example of how stocks and sectors with relative strength to the S&P and/or Nasdaq typically outperform the major indices when the general market moves higher. Remember that anything that does not move lower when the broad market sells-off is usually the first thing to surge higher when the S&P and/or Nasdaq eventually bounces. Obviously, the inverse of that statement is true regarding stocks and sectors with relative weakness.

The S&P, Nasdaq, and Dow are now facing the "moment of truth," as they have each approached resistance of their 20-day moving averages. Further, their 20-day MAs are converging with resistance of their respective March highs. Last week, we illustrated how overhead resistance of the 20-day MAs triggered a resumption of the downtrend, and a subsequent breakdown to new lows, during the broad market's correction from May - July 2006. We shall soon see if history repeats itself this time around. We have pointed out resistance of the descending 20-day MAs on the daily charts of the S&P, Nasdaq, and Dow below:







The Federal Reserve Board begins a two-day meeting on economic policy today that will conclude with an announcement on interest rates tomorrow afternoon. Virtually nobody is expecting an actual change in interest rates, but traders will be highly anticipating any changes in their stance going forward. The recent news of sub-prime mortgage problems combined with fears of a possible slowing in the economy could result in a more volatile reaction to tomorrow's FOMC announcement than usual. Stay alert and remember to trade what you see, not what you think!

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.