Finding a bit of support at their 20-day exponential moving averages yesterday, the major indices bounced to recover a majority of the previous day's losses, but lighter volume undermined the bounce. After a whippy session of trading, both the S&P 500 and Nasdaq Composite settled 1.0% higher. The Dow Jones Industrial Average, small-cap Russell 2000, and S&P Midcap 400 indices all rose 0.9%. Grinding their way back from an early afternoon sell-off, the main stock market indexes closed near the upper quarter of their intraday ranges.

Total volume in the NYSE declined 7%, while volume in the Nasdaq registered 5% lighter than the previous day's level. While yesterday's price action alone may have been encouraging, it was negative that lighter volume once again accompanied an "up" day, especially considering the previous session's "distribution day." Until institutions flex their muscles by sending stocks higher on increasing volume, traders must tread very carefully on the long side of the market. Reduced position size and a very short-term time horizon are two effective ways to decrease risk in the current environment.

The major indices are now stuck between support of their 20-day exponential moving averages below and resistance of their 50-day moving averages above. Since a longer timeframe carries more weight than a shorter timeframe, it follows that the near-term resistance levels are presently more substantial than the support levels. This is further compounded by the negative price to volume relationship the broad market has been displaying. The main stock market indexes are now trapped "between a rock and hard place," which is represented on the daily chart of the Dow Jones Industrial Average below:



It's not the first time the major indices have pulled back to trade between their 20 and 50-day moving averages since the rally off the March 2009 lows began. However, it's the first time the 50-day was acting as resistance and the 20-day as support. Because the correction that began last month has been more protracted than others of the past eleven months, the 20-day EMA crossed below the 50-day MA about four weeks ago. Such a moving average crossover indicates a shift to a bearish intermediate-term trend. Based on this pattern, with the 20 and 50-day moving averages tightly enclosing the prices of the major indices, one should be prepared for high volatility in the coming days.

Overall, we're not finding a lot of plays yielding great results in this market. On the long side, most leadership stocks have given back enough of their recent gains to have damaged chart patterns. In terms of new leadership developing, the strongest stocks over the past couple weeks have been micro cap stocks trading around $12 per share. While these may provide a bit of upside momentum for short-term traders, they are unlikely to constitute substantial leadership over the longer term. As for previous leaders, a new period of price consolidation could solve the technical damage on the charts. Unfortunately, the short side has not been much more favorable, as we're seeing very few stocks and ETFs that are dying. This leaves astute traders with two basic choices: 1.) stay on the sidelines, in capital preservation mode, until conditions improve or 2.) focus on very short-term, momentum-driven trades (lower your profit expectations and time horizon).

Open ETF positions:

Long - (none)
Short (including inversely correlated "short ETFs") - PSQ, EEV

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.