After gapping higher on the open, the major indices climbed steadily, at least until the afternoon Fed announcement on economic policy. Immediately thereafter, stocks exhibited the usual, erratic post-Fed price action before surrendering a chunk of their intraday gains into the close. Nevertheless, the main stock market indexes still finished with gains of more than 2%. The Nasdaq Composite jumped 2.3%, the S&P 500 2.2%, and the Dow Jones Industrial Average 2.1%. The small-cap Russell 2000 raced 3.9% higher, as the S&P Midcap 400 advanced 2.8%. The S&P 500, Dow Industrials, and Nasdaq Composite closed near the upper third of their intraday ranges.

Turnover swelled across the board, enabling both the S&P 500 and Nasdaq Composite to score a bullish "accumulation day." Total volume in the NYSE increased 18% above the previous day's level, while volume in the Nasdaq rose 13%. Although institutional buying was prevalent, volume in the NYSE still failed to exceed 50-day average levels. However, market internals were solid. In the NYSE, advancing volume beat declining volume by more than 7 to 1. The Nasdaq adv/dec volume ratio was positive by nearly 4 to 1.

Yesterday, the Nasdaq 100 Index ($NDX) became the first of the major indices to reach its 200-day moving average (MA). The index bumped into that key indicator of long-term trend on an intraday basis, then settled to close just below it. It was the first time since September of 2008 the Nasdaq 100 touched its 200-day MA. Below, this is illustrated on the daily chart of PowerShares QQQ Trust (QQQQ), a well-known ETF proxy of the Nasdaq 100 Index:



While hedge funds, mutual funds, and other institutions frequently view the 50-day MA as a reliable indicator of intermediate-term trend, the 200-day MA is viewed as a pivotal indicator of long-term trend. As such, the 200-day MA often acts like a brick wall resistance level that stops rallies dead in their tracks (if approached from below), or provides rock-solid support (if price is caught from above). Rarely will an index, stock, or ETF blast through its 200-day MA on the initial attempt. Rather, the first test of the 200-day MA usually triggers a pullback before the price makes another attempt at breaking through the 200-day MA. In many cases, the 200-day MA even marks the end of an intermediate-term, countertrend bounce, and causes the dominant, long-term trend to resume. This is what happened with the S&P 500 Index, back in May of 2008. Take a look:



After trending lower from October 2007 through March 2008, the S&P 500 reversed to enter into an intermediate-term, countertrend bounce. From March 2008 through May 2008, the S&P 500 settled into an intermediate-term uptrend, lending hope to the bulls. But when the index ran into the initial test of its 200-day MA on May 19, that marked the absolute end of the intermediate-term rally. Less than two months later, the S&P 500 fell below its March 2008 low, technically resuming the long-term downtrend that began with the October 2008 high. The S&P 500 has been trading well below its 200-day MA ever since.

Like the S&P 500 on the chart above, the Nasdaq 100 is presently in an intermediate-term uptrend, within the context of a long-term downtrend. However, we are NOT implying this first touch of the 200-day MA will cause the Nasdaq 100 to reverse to new lows, as it did with the S&P 500 last year. Still, it's very important to be aware of the power of this moving average as an indicator of support or resistance -- the S&P 500 chart above is just one of countless instances where the 200-day MA acts like a brick wall.

More commonly than immediately leading to a resumption of the dominant trend direction on the first test, the 200-day MA will usually be probed several times. On the first touch, it's even common for the price to close above the 200-day MA for a day or two before pulling back to subsequently try again. But regardless of whether the 200-day MA triggers a major reversal lower, or merely leads to a pullback, it would indeed be quite unusual if the Nasdaq just blasts through its 200-day MA without looking back. With the Nasdaq being the first index to reach its 200-day MA from below, and other indexes approaching as well, we're about to find out whether the current rally off last month's lows is sustainable. It's not a bad time to lay low, maintaining a large cash position until the market makes up its mind.

Open ETF positions:

Long - FXY, QID
Short - (none, but QID is inversely correlated)

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.