A huge bounce in the beaten-down financial sector sparked a massive rally on Wall Street yesterday, enabling the major indices to score their largest one-day gains in months. Stocks gapped higher on the open, then trended steadily higher as the day progressed. The Nasdaq Composite jumped 7.1%, the S&P 500 6.4%, and the Dow Jones Industrial Average 5.8%. The Russell 2000 zoomed 7.1% higher and the S&P Midcap 400 climbed 6.9%. All the main stock market indexes closed at their best levels of the day, for a change, indicating no signs of intraday profit taking.

Volume surged across the board, causing both the S&P 500 and Nasdaq Composite to convincingly register a bullish "accumulation day." Total volume in the NYSE raced 40% above the previous day's level, while volume in the Nasdaq swelled 19%. Not surprisingly, market internals were quite bullish. In the NYSE, advancing volume trounced declining volume by a margin of 25 to 1. The Nasdaq adv/dec volume ratio, at 20 to 1, was similarly positive.

In yesterday's Wagner Daily, we said, "What news or technical event will finally give traders and investors a reason to step back in the markets to at least spark a short-term rally? One possibility could be a rebound in the annihilated financial sector, particularly the banks. If bank stocks start to bounce off their lows, it could pull the rest of the broad market with it. . .The big question, of course, is whether yesterday's strength in financials was just a one-day fluke that will fade away within the next several days, or if the sudden upside momentum will continue to strengthen. If the latter situation occurs, it's hard to imagine the overall stock market would not be inclined to move higher alongside of the financials, at least in the short-term."

Since the S&P Banking Index ($BIX) followed up Monday's 10.7% advance with a whopping 15.8% gain yesterday, it's fair to say major strength in the financials was indeed the driving force behind yesterday's rally. But with the S&P Banking Index already bouncing to resistance of its 20-day exponential moving average (EMA), it will be interesting to see whether or not the index is able to overcome that key short-term resistance level this time around. Recall from yesterday's daily chart of the $BIX that, last month, the 20-day EMA precisely stopped two rally attempts dead in their tracks. Will this time be different?

Yesterday, money flowed out of the defensive gold and silver commodities, and into the equities markets, causing our positions in Gold Double Long (DGP) and iShares Silver (SLV) to retreat. However, both ETFs are now trading near key support of their 50-day moving averages, as well as the lower channel of their multi-month uptrend lines, which could cause them to snap back quickly. DGP also is right at support of its 200-day moving average, a significant level of long-term support. This is shown on the daily charts of DGP and SLV below:





Because of convergence of their moving averages and primary uptrend lines, as shown on the charts above, DGP and SLV actually present low-risk buying opportunities at current levels. The longer a trend has been in place, the more likely the direction of the dominant trend will continue. Since both ETFs have been in uptrends for more than three months, odds technically favor a resumption of their uptrends from here. But if DGP and SLV fail to reverse higher, and their uptrend lines become broken, our protective stops are already in the right place, just below yesterday's lows.

On an absolute basis, yesterday's broad-based gains were certainly impressive. However, on a relative basis, the gains were not monstrous. Considering the S&P 500 had nosedived 25% in less than ten weeks, it's logical to assume the percentage gains of the eventual bounce would be large as well. While yesterday's session was definitely encouraging, it's important to keep the gains in perspective.

A one-day bounce, no matter how large, does not signal a market bottom and give the "all clear" signal to start buying. Since the beginning of 2009, there have been a handful of other sessions where stocks scored similarly large gains. . .only to quickly tumble to new lows shortly thereafter. Obviously, the possibility exists that the same bearish trend will continue. For this time to be different, one thing we need to see is clear leadership among individual stocks. Yesterday, the biggest movers were stocks bouncing off their lows, not stocks showing relative strength near their highs. We'll be monitoring to see if this changes soon.

Rather than trying to guess whether or not yesterday's rally will mark the start of a significant bottom (not necessarily the bottom), it's safer to wait for additional price and volume confirmation. In our March 9 commentary, we said, "...to prevent getting sucked into a fakeout one-day bounce again, we now plan to at least wait for the formation of a "higher low" and subsequent "higher high" before attempting to buy any broad-based ETFs." Waiting for such a formation continues to be our plan. If a tradeable, intermediate-term rally develops (which we think it easily could), we won't catch the absolute bottom, but we'll catch the "meat out of the middle." More importantly, we'll do so with less risk of getting prematurely stopped out in a vicious cycle. In the meantime, we'll be closely analyzing the market in the coming days, as well as looking for sectors with relative strength and weakness.

Open ETF positions:

Long - DGP, SLV, UGA
Short - (none)

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.