Stocks bounced back from their recent sell-off last Friday, but lower turnover indicated that institutions remained on the sidelines. After opening flat, the major indices drifted in a range throughout the morning, then trended higher in the afternoon. The Nasdaq Composite gained 1.3%, the Dow Jones Industrial Average 1.2%, and the S&P 500 1.1%. The small-cap Russell 2000 and S&P Midcap 400 indices were higher by 1.2% and 1.1% respectively. Each of the major indices closed at their intraday highs, though below their previous day's highs.

On a percentage basis, Friday's recovery attempt was solid. However, lighter volume in both exchanges tells us the rally was more the result of the bears taking a break, rather than the bulls aggressively stepping back into the markets. Total volume in both the NYSE and Nasdaq receded 18% below the previous day's levels. Market internals were firmly positive, though not extreme like the prior session's negativity. Advancing volume in the NYSE exceeded declining volume by a margin of 6 to 1. The Nasdaq ratio was positive by 5 to 1.

Last Friday's gains were likely the result of the S&P 500, Nasdaq Composite, Russell 2000, and S&P Midcap 400 indices all testing and bouncing off support of their 50-day moving averages. In the June 8 issue of The Wagner Daily, we said the following, "Notice that the S&P also closed less than three points above its 50-day MA, so expect a test of that major support level today. Historically, the 50-day moving average is the level at which institutions look to buy stocks that are pulling back . . ." As anticipated, that's what happened in the S&P, as well as several other indices. The textbook rallies off the 50-day moving averages are illustrated on the four daily charts below:









Each of the indexes shown above registered perfect bounces off their 50-day MAs, but notice that a lot of technical resistance still remains. Most importantly, the prior uptrend lines (the red, dashed lines) on the S&P, Nasdaq, and S&P Midcap 400 that were broken a few days ago will now act as resistance. When an uptrending index breaks through support of a primary trendline, it usually requires a bit of time, or sometimes a deeper correction, before the index can recover back above the same trendline. The inverse is true of downtrending indexes that break out above descending trendlines. Unlike the other major indices, Friday's gains sent the Russell back above support of its primary uptrending channel. In addition to the prior uptrend lines, expect the 20-day exponential moving averages (the beige lines on the charts above) to now provide resistance as well.

Of the five broad-based stock market indexes we monitor daily, the Dow Jones was the only one that did not bounce off its 50-day MA. Because it showed relative strength on the way up, it is still several hundred points above its 50-day MA. Nevertheless, it still has resistance of its prior uptrend line and 20-day EMA to contend with.

We obviously cannot rule out the possibility of further gains in the coming days, but it will take a lot of volume to power back above the resistance levels that were recently broken. Conversely, 50-day moving averages are not easily broken on the initial tests. As such, the markets are likely to be choppy and volatile in the coming week. Be prepared through either positioning yourself on both sides of the market, or shifting primarily to cash. Don't forget that cash is always a valid position! Above all, 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.