Stocks snapped back with a solid session of gains yesterday, as the S&P and Nasdaq contended with resistance of their four-month downtrend lines. The major indices trended higher in the morning, then chopped sideways to lower throughout the afternoon. The Nasdaq Composite rose 0.9%, the S&P 500 0.6%, and the Dow Jones Industrial Average 0.5%. The samll-cap Russell 2000 and S&P Midcap 400 indices were higher by 0.8% and 0.6% respectively. Showing a lack of direction into the close, the main stock market indexes closed near the middle of their intraday ranges.

Total volume in the NYSE increased 6% above the previous day's level, while trading in the Nasdaq ticked 19% higher. The higher volume across the board enabled both the S&P and Nasdaq to register a bullish "accumulation day." On Tuesday, the Nasdaq declined on increased trade, so it was positive that even higher volume accompanied yesterday's gains. Turnover in the Nasdaq also moved back above its 50-day average level, but volume in the NYSE remained lighter than average. Market internals were solid. In both the NYSE and Nasdaq, advancing volume exceeded declining volume by more than 5 to 2.

In our September 7 commentary, we said the S&P 500 SPDR (SPY) was approaching resistance of its 200-day MA, as well as its downtrend line from the April 2010 high. Because the index has oscillated in a tight, sideways range since then, the same resistance levels remain in effect. On the daily chart below, notice how the price of SPY is squeezing up against the four-month downtrend line, while the 200-day MA remains just above as well:



Notably, the Nasdaq Composite Index is displaying the same pattern:



The tech-heavy Nasdaq 100 Index, the brother of the Nasdaq Composite Index, is already above its 200-day MA, but has bumped into resistance of its intermediate-term downtrend line as well. In yesterday's session, PowerShares QQQ Trust (QQQQ), a popular ETF proxy for the Nasdaq 100 Index, probed above its downtrend line on an intraday basis, but failed to convincingly close above it. Take a look:



Like the S&P 500, the blue chip Dow Jones Industrial Average remains below both its 200-day MA and downtrend line. However, the 200-day MA, just above the three-day highs, is the first resistance level, and the downtrend line is further beyond. The daily chart of Dow Jones DIAMONDS (DIA) is shown below:



As these charts clearly illustrate, the major indices are once again at pivotal resistance levels. Since the resistance levels are quite obvious, a one or two-day "overcut" that probes above the downtrend lines and/or 200-day MAs would not be surprising. But the big question is whether or not such a "stop run" would be sustainable. While it may be tricky to initiate new short positions until near-term sentiment turns bearish again, it's equally risky to be entering new long positions at pivotal levels in the broad market.

The bottom line is that a directionless, choppy trading range remains the dominant theme in the markets. Eventually, this will change, and great opportunities for trend trading will present themselves again. But right now, "SOH mode" (sitting on hands) may be the best plan of action. Alternatively, an ETF portfolio hedged on both sides of the market (long the relative strength, short the relative weakness) makes sense, but consider keeping a shorter than usual time horizon on profit taking.

Open ETF positions:

Long - DBA, UUP, TUR
Short (including inversely correlated "short ETFs") - SSG, EPV

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.