Trading kicked off the last week of April on a rather dull note, as the major indices chopped around in a sideways to descending range before finishing the day flat to slightly lower. However, modestly higher volume in the NYSE pointed to another round of institutional selling. The Dow Jones Industrial Average was unchanged, the Nasdaq Composite slipped 0.3%, and the S&P 500 lost 0.4%. Small and mid-cap stocks took a well-deserved breather, as both the Russell 2000 and S&P Midcap 400 indices declined 0.4%. All the main stock market indexes closed near their intraday lows.

Total volume in the NYSE ticked 2% higher, while volume in the Nasdaq was 1% lighter than the previous day's level. The higher volume loss of the S&P 500 caused the index to register another bearish "distribution day," the fifth such instance of selling amongst mutual funds, hedge funds, and other institutions in recent weeks. Although a healthy market typically absorbs a few "distribution days" without negative effect, the presence of five more days of higher volume losses is a valid warning sign to the bulls that a correction may be just around the corner. We've been saying a positive price to volume relationship of the broad market is a key confirming indicator that has been missing in recent weeks, and yesterday's distribution added to that case. Nevertheless, price action among leading stocks remains relatively solid, and the Nasdaq, which has only had two "distribution days" during the same period, has been exhibiting a much better price to volume relationship.

Several weeks ago, we looked at the long-term weekly chart of the S&P 500, and pointed out that the index had retraced more than half the loss from its October 2007 high down to its March 2009 low. At the time, we said the S&P would likely continue to grind higher until reaching major resistance of its 61.8% Fibonacci retracement level. When markets form a substantial counter-trend bounce, they typically retrace 38.2% to 61.8% of their prior moves before resuming the dominant trend. Fast forwarding several weeks later, the S&P is now just a few points below its 61.8% Fibo retracement level. This is shown on the weekly chart of the S&P 500 below:



Since the 61.8% Fibo retracement level is considered the "last line of defense" before a trend completely reverses itself, the current pricing area of the S&P 500 is pivotal. If the index manages to convincingly bust through the 61.8% retracement level shown above, odds of the S&P recovering all the way back to its prior highs of 2007 increase substantially. However, IF the market is going to head back down and resume its dominant, long-term downtrend, this is area where it would likely happen. Yet, a third scenario is that the index will merely trade sideways for an extended period of time, oscillating between its 50% to 61.8% retracement level. This third scenario was predicted in our year-end report of 2009, and it still appears to be a very realistic possibility.

Like the S&P 500, the Dow is also now testing pivotal resistance of its 61.8% Fibonacci retracement, and the same general analysis of the S&P above is applicable for the chart of the Dow. However, it's a different picture for the Nasdaq Composite. When comparing the same period of the 2007 highs down to the 2009 lows, the Nasdaq has already moved beyond its 61.8% retracement, and is now rapidly approaching its 2007 highs. But one critical difference between the S&P and Nasdaq is the 2007 high of the S&P is also the all-time high of the index. Conversely, the 2007 high of the Nasdaq represents a Fibo retracement of just over 38.2% of the range from its March 2000 high down to its October 2002 low (the period known as the "dot com crash"). This is illustrated on the even longer-term monthly chart of the Nasdaq Composite below:



At this point, it would not surprise us if the Nasdaq recovered back to its 2007 high in the intermediate-term. However, in the bigger picture of the monthly chart, such a retracement would still be less than a 50% retracement to the all-time high of the index. For that reason, it could be argued the Nasdaq has more upside potential in the long-term, at least up to its 61.8% Fibonacci retracement of the "dot com crash." That would put the Nasdaq just over the 3,500 level. The S&P and Dow, on the other hand, are already at key levels of price resistance they may find difficult to overcome, unless they smash through their current highs on strong volume. In that case, a test of the 2007 highs could follow suit.

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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.