Bouncing off support of their 20-day exponential moving averages, the major indices reversed early losses to finish sharply higher yesterday. Stocks opened moderately lower, quickly rallied into positive territory, chopped around in the afternoon, then climbed to finish at their intraday highs in the final minutes of trade. The Nasdaq Composite jumped 2.2%, the S&P 500 2.1%, and the Dow Jones Industrial Average 1.6%. Small and mid-cap stocks, the biggest losers in Monday's session, were the biggest gainers. The Russell 2000 and S&P Midcap 400 indices advanced 3.9% and 3.1% respectively.

Yesterday's rebound from the previous day's sell-off was encouraging, but lower volume across the board tells us institutions were not very anxious to jump back in the markets. Total volume in the NYSE eased 5%, while volume in the Nasdaq declined 15% below the previous day's level. Although higher volume would have been more bullish, market internals were still pretty good. In the NYSE, advancing volume beat declining volume by an impressive margin of 6 to 1. The Nasdaq adv/dec volume ratio was positive by 4 to 1.

In yesterday's commentary, we pointed out an ETF setup (FXP long) for traders interested in taking advantage of short-term downward momentum in the broad market. In addition, we also like the relative weakness displayed by the biotech sector, which has lagged the gains of the broad market in recent weeks. Since the sector showed relative weakness while the overall market was rallying, it's not shocking the industry quickly turned lower at the first sign of the stock market's pullback on Monday. As a proxy of weakness in the biotech sector, check out the daily chart of iShares Nasdaq Biotech (IBB):



The blue horizontal line on the chart above marks a significant level of price support IBB is testing. On April 20, IBB closed just below that level, then bounced slightly in yesterday's session. If looking for a quick short setup to take advantage of any further weakness in the market, IBB may be a nice short entry below the April 20 low (below the $63 area).

After Monday's average decline of 4.6% in the major indices, one logically could have expected a bounce in yesterday's session. However, we were admittedly a bit surprised by the strength of the bounce. Although yesterday's session was not as strong as the previous day's session was weak, the main stock market indexes still rallied 2.6% on average (a retracement of just over half of Monday's losses). But even though the stock market remains resilient, odds still favor a significant correction from the recent highs, albeit a potentially volatile one. Only a rally above the April 17 highs in the main stock market indexes would invalidate our expectation of further downside in the short-term.

Open ETF positions:

Long - FXP, OIH
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.