Stocks commenced the month of February on a high note yesterday, as all the main stock market indexes rose more than 1%. However, substantially lighter volume meant the rally's bark was bigger than its bite. Still, the broad-based advance provided a bit of relief to the market's recent string of losses. The S&P 500 climbed 1.4%, the Dow Jones Industrial Average 1.2%, and the Nasdaq Composite 1.1%. The small-cap Russell 2000 gained 1.2% and the S&P Midcap 400 increased 1.5%. Although most of the stock market's gains occurred on the open, the major indices still finished at their intraday highs.

Turnover dropped off steeply, preventing the S&P and Nasdaq from scoring a bullish "accumulation day." Falling below its 50-day average level, total volume in the NYSE receded 29%. Overall volume in the Nasdaq was 31% lighter than the previous day's level. While yesterday's decent bounce may have been encouraging at first glance, the significantly slower pace of trading points to a lack of institutional support. As explained several times over the past week, one should not place faith in the formation of a short-term bottom if the recovery attempt is not accompanied by higher volume.

In yesterday's Wagner Daily, we discussed how the S&P 500 might stage a short-term bounce. Specifically, we said, "the S&P could just as easily rally above its short-term downtrend line in today's session. If it does so and sticks, and only if higher volume confirms any rally, swing traders may find a few momentum-based trade setups that have the potential to provide quick profits on the broad market's bounce." We then annotated the charts of four ETFs (KRE, IBB, CIU, TUR) that have recently been showing relative strength, each of which was a potential buy candidate if the broad market started to reverse. However, because volume was tracking much lighter throughout the entire session, we passed on buying any additional ETFs.

Although we did not enter any new positions yesterday, one of our three existing positions, First Trust Natural Gas (FCG), outperformed the S&P 500 with a 4.5% gain. More importantly, FCG reclaimed its 50-day moving average, and is also breaking out above resistance of its hourly downtrend line. If the broad market continues bouncing in the near-term, FCG should continue rallying, at least to resistance of last month's high. On the daily chart of FCG below, notice how the "gap" from December 14 perfectly acted as support to spark yesterday's rally. Our protective stop is set in the right place, just below the January 29 low:



Even though yesterday's broad market advance was on declining volume, the major indices could still continue higher in the near-term. The caveat is just that bullish reversals following substantial corrections are rarely sustainable if they are marked by lighter volume the whole way up. Therefore, in case stocks attempt to build on yesterday's gains, which is a very good possibility, it's prudent to be aware of the next short-term resistance levels in the S&P 500, a popular benchmark for the overall market. Below, we have annotated the resistance levels to watch in the coming days:



The 1,101 level is the first significant area of resistance the S&P may encounter, as that price marks the highs of the prior bearish consolidation (from January 25 to 28), as well as the highs from October 2009. Beyond that, the 20-day exponential moving average is presently at 1,110. The more significant 50-day moving average is at 1,113. If the S&P manages to get past the 1,101 area, the 1,110 - 1,113 area may be much more difficult to overcome. As for short-term support, the January 29 low of 1,071 is key. If the index closes below that level within the next few days, all bets are off for a short-term bottom.

Very short-term momentum traders may attempt to take advantage of the current bounce in the market, but should be ready to immediately hit the exit door if the rally continues on declining volume. In the near-term, our general plan is to sell our long positions into strength, locking in gains as the major indices run into overhead resistance. Thereafter, unless upside volume suddenly comes back into the markets, we will look to enter one or two new short positions (or inversely correlated ETFs) into the bounce. UltraShort Real Estate (SRS) is a bearish ETF we're monitoring for entry. Specifically, we'd like to see an "undercut" of the 20/50-day MA convergence, which would provide a positive reward-risk ratio on the trade.

Open ETF positions:

Long - FCG, UUP, EWJ
Short (including inversely correlated "short ETFs") - (none)

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.