Following through on the previous day's weak closing action, stocks initially moved lower in the first hour of trading, but the resilient bulls made a heroic rescue that reversed the intraday trend. Recovering all of the previous day's losses, the major indices averted the break of key levels of technical support. The Dow Jones Industrial Average rose 1.3%, the S&P 500 1.1%, and the Nasdaq Composite 0.7%. The small-cap Russell 2000 gained 1.4%, as the S&P Midcap 400 climbed 1.3%. Opposite of the previous day, each of the main stock market indexes closed near its intraday high.

While yesterday's recovery may have been impressive, higher volume was a major element lacking from the advance. In the NYSE, total volume was 6% lighter than the previous day's level. Turnover in the Nasdaq receded 13%. The lighter trade tells us institutions, which typically account for more than half of the market's average daily volume, were not active participants in yesterday's rally. As such, the stock market's price to volume relationship remains bearish. After seven "distribution days" over the past month, the S&P and Dow really needed to see a session of higher volume gains to ease the bearish trend, but that wasn't the case yesterday. If institutions decide to resume the selling that swiftly struck the market on Wednesday afternoon, the bulls will require a much more concerted effort in order to defend yesterday's gains.

On several occasions over the past two weeks, we've pointed out the potential trend reversals that were shaping up in the various fixed-income ETFs, particularly the iShares 20+ year (long-term) Treasury Bond (TLT). After breaking below support of its 50-day moving average on October 14, TLT traded below it a few days, then popped back above its 50-day MA on October 20. However, the bullish move was short-lived, as TLT fell back below its 50-day MA the following day. Now, with TLT apparently unable to reclaim support of its 50-day MA, it appears the long-term bond ETF may be headed for further downside. Below is the daily chart of TLT:



Based on the uptrend line from its June 2009 low, TLT will technically not reverse its dominant uptrend until it breaks down below the $94 area, or below its "swing low" from last week. As TLT is in danger of breaking below that uptrend line, the inversely correlated UltraShort 20+ year Treasury Bond (TBT) is positioned to reverse its downtrend. Because of the daily rebalancing involved in the UltraShort ETFs, the daily chart of TBT is not a precisely inverse pattern. TLT also pays monthly dividends, at which point its price is adjusted lower to reflect the "ex-dividend" pricing. TBT, on the other hand, doesn't pay a monthly dividend, so that's another factor that causes a different pattern to appear in TBT. Presently, TLT is already trading below its 50-day MA, but TBT is still just a tad below its 50-day MA. Take a look:



When investing or trading in the UltraShort ETFs on a long-term basis, the price divergence between the underlying portfolio is significant. However, for short-term, momentum-based moves, we've found ETFs such as TBT to be ideal trading vehicles. If one immediately buys the break of the downtrend line in TBT, realize TLT may still be trading a hair above its uptrend line. But at the same time, one could take a slightly more aggressive buy entry into TBT, just above yesterday's high and downtrend line, because TLT has already broken below support of its 50-day MA.

It wasn't shocking that the broad market bounced yesterday, but it was admittedly a bit surprising the major indices recovered all of their previous day's losses, and then some. Going into today, we believe that leaves stocks in a very short-term "no man's land." Certainly, there's still no reason to be aggressively positioned on the short side of the market, which is why we're only "testing the water" with a singular short position. Conversely, it's risky to step in and buy at current levels, right as the major indices test resistance of their recent highs, and with an overall bearish price to volume relationship to contend with. Therefore, the best plan of action may be to shift into "SOH mode" (sitting on hands). Our job as professional traders is to make consistent profits over the long-term. Our job is NOT to be in the market at all times, just for the sake of activity. Some of the most successful traders I know are OUT of the markets more than they are IN the markets. Right now may be a good time to do nothing (other than manage existing positions). When the market shows its hand for the next convincing move, in either direction, that will be the time to take action.

Open ETF positions:

Long - DBB, USO, SLV (half position), UNG, SEA
Short - SRS (an inversely correlated ETF we're long)

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.