A relatively quiet session of trading concluded with the major indices finishing in the red yesterday, but the moderate losses were on lighter volume. After trading in a sideways range throughout most of the day, stocks briefly moved to new highs of the day into the 2:30 PM reversal period. However, the enthusiasm was short-lived, and the main stock market indexes reversed to new intraday lows into the close. The Dow Jones Industrial Average lost 0.4%, the Nasdaq Composite 0.5%, and the S&P 500 Index 0.6%. Although small and mid-cap stocks frequently underperform the broad market on down days (and outperform on many up days), the Russell 2000 and S&P MidCap 400 indices showed relative strength yesterday, slipping only 0.4% and 0.2% respectively. All the major indices closed near their worst levels of the day.

Total volume in the NYSE eased 14%, while volume in the Nasdaq registered 4% lighter than the previous day's level. In both exchanges, turnover was below 50-day average levels. Since the broad market closed lower, near the highs of its recent range, the lighter volume was an important sign that pointed to a lack of selling pressure from mutual funds, hedge funds, and other institutions. Market internals were also not bad. In the NYSE, declining volume exceeded advancing volume by less than 2 to 1. The Nasdaq adv/dec volume ratio was only fractionally negative.

Let's take an updated look at the overall technical picture of the broad market, using the popular S&P 500 SPDR (SPY) as a benchmark ETF proxy. Take a look at the daily chart below:



The dashed horizontal line on the chart above marks pivotal support of the recent breakout level ($113 area for SPY and the 1,130 area on the S&P 500 Index). On September 23, notice that SPY "undercut" that obvious support level, but immediately snapped back above it the following day. Such action undoubtedly triggered stop orders of bulls who were late to the buying party, thereby absorbing overhead supply. This is how a bullish "undercut" of support typically works.

In the near-term, one of the best senarios for SPY would be a tight, light volume consolidation pattern for the next several weeks, holding above that key level of support. This would have the benefit of allowing the broad market to absorb its recent gains, while building a base of support from which to potentially launch another leg higher. Nevertheless, given the indecisive price action we have become accustomed to seeing in recent months, another test of the breakout level would not be at all surprising. If this occurs, it will be important for the September 23 low to provide support. This is because that day's low now converges with support of both the 20-day exponential moving average (dashed black line) and the 200-day moving average (thick orange line) as well. The convergence of these three key levels of near-term support is highlighted with a pink rectangle on the chart above.

While the daily chart pretty clearly conveys the near-term technical picture, it's also important to take a look at the weekly chart interval. This longer-term timeframe removes the "noise" from the daily chart, and more clearly gives a "big picture" view of the market. The weekly chart of SPY is below:



Although the daily chart of SPY is starting to look more bullish, just a quick glance at the weekly chart gives one the feeling the ETF is in "no man's land." In such situations, we like to use Fibonacci retracement lines to give a little more clarity as to the actual trend. As you can see, SPY is currently testing pivotal resistance of its 61.8% Fibonacci retracement (measured from the April 2010 high to July 2010 low). Typically, the 61.8% retracement level is considered to be the "last line of defense" for a countertrend bounce, before the prior trend is likely to completely reverse. Put another way, if SPY holds its recent breakout level, and convincingly moves above last week's high within the next few weeks, it would be relatively safe to say the prior downtrend from the April 2010 highs has concluded. Thereafter, a recovery back to the April high could follow; breakouts above 61.8% Fibonacci retracement levels frequently lead to full retracements back to the prior highs.

As we recently said in our commentary, the broad market is now at a major crossroads. IF stocks are going to head back down to retrace a large portion of their gains off the August lows (perhaps a 38.2% to 50% Fibonacci retracement), this is about the time and place they would do so. Conversely, a solid rally above last week's highs could spark the necessary bullish momentum to send the major indices marching back to their April 2010 highs. Presently, overall price action, chart patterns, and volume patterns continue to favor the bulls, but the summer memories of swift and sudden trend reversals is still fresh on the minds of traders and investors. Stay alert, and remember to "trade what you see, not what you think."

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.