In a rare show of resilience, stocks bagged their third straight day of gains yesterday, as bullish momentum heated up across the board. With stocks getting off to a lower start in the morning, bears had the perfect excuse to resume control, but they didn't. Buyers promptly stepped up to the plate instead, setting in motion a steady uptrend that persisted until the closing bell. The S&P 500 jumped 4.1%, the Nasdaq Composite 4.0%, and the Dow Jones Industrial Average 3.5%. Though small-caps showed slight relative weakness in the previous session, the Russell 2000 roared back with a 6.5% gain yesterday. The S&P Midcap 400 Index climbed 4.7%. All the major indices closed at their best levels of the day.

Total volume in the NYSE rose 3%, while volume in the Nasdaq increased 11%. The strong gains on higher volume enabled both the NYSE and Nasdaq to register another bullish "accumulation day," the second such instance of institutional buying within the past three days. The third of those three days was a healthy, lower volume session of price consolidation. In a very short period of time, the stock market's underlying internals, particularly the volume patterns, have turned bullish.

In the March 10 issue of The Wagner Daily, we discussed the clear relative strength the banking stocks had suddenly begun showing. Recall that the S&P 500 lost 1.0% the previous day, but the S&P Banking Index ($BIX) conversely zoomed more than 10% higher. Because the financial sector led the way lower when the overall market was selling off, we suggested the inverse would also be true, meaning that strength in financials could also precede broad market gains. Specifically, we said it would be "hard to imagine the overall stock market would not be inclined to move higher alongside of the financials, at least in the short-term." Indeed, it appears the sharp bounce in the financial arena was the initial impetus for the current rally. In the first four days of this week, the $BIX Index has logged a monstrous 48% gain! Unquestionably, that humongous bounce in banking stocks was a major factor in this week's S&P 500 advance of nearly 10%.

Yet, regardless of how impressive the current rally in banking stocks may be, it's important to realize financials were merely a beaten-down sector, bouncing off historical lows. While such action can, and often does, spark a short-term rally in the main stock market indexes, dead sectors simply cannot drive a market higher in the intermediate to long-term. For that to occur, there needs to be leadership among a few industry sectors, as well as individual stocks, breaking out to new highs. So far, that's not happening; however, leading stocks have definitely begun to act better over the past several days. With stocks trying to reverse off multi-year lows, it may take some time for bullish setups to develop, assuming the broad market reversal holds up as well.

Yesterday, we pointed out the relative weakness in the healthcare sector, and suggested that several healthcare ETFs may be short sale candidates if they rally into resistance of their 20-day exponential moving averages. Nevertheless, we also cautioned that we would only be looking to enter those short sales if the broad market rally fizzled out as well. Based on yesterday's strong price action, the major indices are not yet showing any signs of fizzling out. As such, all bets are off on shorting these ETFs, at least for now.

The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average have all busted through resistance of their 20-day exponential moving averages (albeit, the Dow just barely has done so). Perhaps more importantly, the benchmark S&P also closed above its intraday low from November 2008. It will be a good sign if the index can reclaim resistance of its November 2008 low and hold above it. If it does so, the next major area of resistance for the S&P 500 is the 50-day moving average, presently at 1,482, though the index is likely to consolidate or retrace substantially before getting there. Below is a daily chart of the S&P 500 SPDR (SPY), a popular ETF proxy for the S&P 500 Index:



We can safely say overall short-term market bias has switched from bearish to bullish, but many traders and investors would like to see a reversal of the intermediate-term trends, a move that would provide us with at least a few months of tradeable stock and ETF plays on the long side. So, what would it take for that to happen? First, the major indices should retrace some of their current gains, preferably in a sudden manner that shakes out the "weak hands" before reversing right back up. This would allow the market to absorb some overhead supply that would have otherwise been created by those who sell at the first hint of a pullback. It would also provide us with ideal buy entries on the pullback. Next, the main stock market indexes would need to recover to breakout above the preceding highs (likely what will be either this week's, or next week's, highs).

If the major indices manage to pull back substantially, then recover to form new "swing highs," as described above, a "higher low" and two "higher highs" would be created on the daily charts. This would give the market good odds of entering into a new intermediate-term uptrend. There is, of course, the remote possibility the main stock market indexes will rally straight into their 50-day moving averages without first pulling back, but this would be unusual when compared to typical bottoming formations.

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.