Like the previous day, stocks got off to a higher start yesterday morning, but subsequently drifted lower as the session progressed. This time, the major indices finished slightly higher, but still near their intraday lows for the second day in a row. Both the Nasdaq Composite and Dow Jones Industrial Average gained 0.3%, while the S&P 500 edged 0.2% higher. The small-cap Russell 2000 and S&P Midcap 400 registered identical advances of 0.5%.

Total volume in the NYSE was 7% lighter than the previous day's level, as volume in the Nasdaq similarly receded 6%. Turnover in both exchanges fell back below 50-day average levels. In the NYSE, advancing volume only marginally exceeded declining volume by a ratio of 3 to 2. The Nasdaq adv/dec volume ratio was just fractionally positive. Overall, yesterday's session was a rather dull one, typical of this time of year when many investors and traders are on holiday.

Lately, the popular financial media has been abuzz with chatter of how incredibly bullish and wonderful the stock market's current rally off the March lows has become. But whenever general public sentiment becomes so slanted in one direction or the other, we like to analyze the long-term weekly charts of the major indices in order to see the true "big picture." While we agree the broad market's resiliency and gains in recent months have been impressive, the weekly charts portray a rather interesting perspective that may be surprising to some investors.

When looking at long-term trends in the market, we rely less on indicators such as volume and moving averages, and instead focus primarily on a reliable indicator known as Fibonacci retracements. Below, we've applied the three most important Fibonacci retracement lines (38.2%, 50%, and 61.8%) to the weekly chart of the benchmark S&P 500 Index:



From its October 2007 high to March 2009 low, the S&P 500 lost more than half its value (approximately 57%). From its March 2009 low to this week's high, the index has rallied 56%. However, because a 50% loss requires a 100% gain to become whole again, it's interesting to note the S&P 500 has only recovered just over one-third of its actual decline from the 2007 high to 2009 low. Specifically, the index has bounced to its 38.2% Fibonacci retracement level. Within the context of trends, countertrend retracements that recover 38.2% to 61.8% (or roughly one-third to two-thirds to keep it simple) of the overall range commonly occur before seeing a resumption of the dominant trend. Only when a retracement exceeds the 61.8% level do the odds of a complete reversal of the dominant trend become favorable. Therefore, on a purely technical level, one can not yet assume the rally of the past five months is anything more than a bounce within the confines of a long-term downtrend. That assessment would change only if the S&P climbed another 200 points, above its 61.8% Fibonacci retracement. Next, let's see how the long-term weekly chart of the Nasdaq Composite compares:



Showing a bit of relative strength to the S&P 500 since beginning the uptrend off its March 2009 low, the Nasdaq has nearly rallied to its 50% Fibonacci retracement level. This is more encouraging than the long-term chart of the S&P 500, but it doesn't change the fact that the Nasdaq technically remains in a dominant downtrend as well. Again, only a move above its 61.8% Fibonacci retracement level of 2,251 could dramatically change the situation. However, putting retracement levels aside for a moment, notice the Nasdaq is now bumping into its long-term downtrend line (the dotted line on the chart above). If the index convincingly breaks out above that trendline this time around, it could very quickly result in a surge to the 61.8% retracement level or more. Keep a watchful eye on the performance of the Nasdaq in the coming weeks, as a breakout above that multi-year downtrend line could have positive implications for the overall broad market. Conversely, a resumption of the dominant downtrend could just as easily occur if the index is unable to break higher here.

The point of the objective charts above is not to scare you into watching for a sudden plunge back to the March 2009 lows (though it certainly is not out of the question). Rather, the long-term charts merely provide traders and investors with a grounded perspective of reality, at times when typical media hype stirs emotions. Maybe the dominant downtrend resumes and leads to an eventual test of the March 2009 lows, or maybe the Nasdaq breaks higher and begins a new, long-term bull market. We certainly can't, and don't attempt to, predict the future. But based on on the present facts, we only know the five-month rally off this year's lows is still nothing more than a (rather impressive) bear market rally.

Open ETF positions:

Long - IBB, DGP
Short - FXI

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.