Gapping down to open sharply lower, the major indices indices briefly traded below short-term support of their prior two days' lows, but the die-hard bulls resumed control, enabling stocks to quickly reverse opening weakness. Thereafter, the broad market trended steadily higher throughout the day before finishing in moderately positive territory. The Nasdaq Composite rallied 0.6% and the S&P 500 advanced 0.2%. The Dow Jones Industrial Average, down 1.0% at its lowest point of the day, eked out a closing gain of 0.1%. Small and mid-cap stocks continued to lead the market. The Russell 2000 and S&P Midcap 400 indices rose 1.1% and 1.2% respectively. Both indexes also broke out above near-term resistance to close at fresh 52-week highs. All the main stock market indexes settled near their intraday highs.

Turnover rose across the board, an encouraging sign considering the negative price to volume relationship of the broad market over the past four days. Total volume in the NYSE increased 8% above the previous day's level, while volume in the Nasdaq ticked 4% higher. In both exchanges, volume was also above 50-day average levels. By advancing on increased trade, both the S&P 500 and Nasdaq Composite registered a bullish "accumulation day, indicating buying amongst mutual funds, hedge funds, and other institutions. In both the NYSE and Nasdaq, advancing volume edged out declining volume by a margin of just over 3 to 2. Although the adv/dec volume ratios were not overly strong, market breadth was extremely weak on the open, then improved steadily as the day progressed.

On April 16, Market Vectors Agribusiness (MOO) sold off sharply, alongside of the broad market. However, unlike the major indices, the decline coincided with MOO breaking below key intermediate-term support of its 50-day moving average that day. Fast forwarding one week later, the major indices have recovered most to all of their April 16 losses. But because of its relative weakness to the broad market, MOO closed yesterday within pennies of its April 16 close. Looking at the daily chart of MOO below, notice the high volume that accompanied the break of the 50-day MA, which has now become new resistance:



When an ETF is so weak that it merely moves sideways as the market rallies, it is typically one of the first ETFs to plunge lower when the broad market dips (just as an ETF moving sideways while market is selling off will typically be the first to surge higher when the market bounces). Therefore, if the S&P is unable to break out above its recent resistance, and slides back down, MOO could break below its April 19 "swing low" and make another leg lower. The combination of the high volume on the break of the 50-day MA, its relative weakness, and new resistance of the 20 and 50-day moving averages just overhead (which have converged), MOO is one of the best looking short setups out there right now. Ideally, we'd consider a short entry on a light volume bounce into the 20/50-day MA convergence, which carries a better reward/risk ratio than selling short a break of support.

In yesterday's commentary, we said the two-day low of the S&P 500 (at the 1,198 level) was a pivotal level of short-term support to monitor because a breakdown below that level could rapidly trigger a change in market sentiment. However, we also specifically cautioned the following, "While a break below this level would likely send the S&P down to test its April 19 low, a critical level of short-term support, realize it is the closing price we're concerned about. An intraday dip below the two-day low that subsequently closes above 1,198 level would actually be bullish, not bearish, as it would be an 'undercut' the shakes out the bulls." Traders who observed that warning were rewarded yesterday, as it would have prevented them from hastily selling short the opening gap down without waiting for further confirmation. On the daily chart of the S&P 500 below, notice how the index probed well below the two-day low on an intraday basis, but closed within the previous day's range, near the unchanged level:



Yesterday's bullish intraday reversal enabled the Nasdaq Composite, Russell 2000, and S&P Midcap 400 indices to close at new 52-week highs. However, as the chart above illustrates, the S&P 500 still must contend with resistance of its recent highs. The same is true of the Dow. Yet, given yesterday's bullish intraday pattern, it would not require much more buying pressure to cause those two indexes to join the rest of the indices at new highs as well.

Open ETF positions:

Long - (none)
Short (including inversely correlated "short ETFs") - FAZ (half position)

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.