Stocks rebounded strongly on Tuesday but on lighter trade. All five major indices posted gains of 4% or more. The small-cap Russell 2000 led the rally as it tacked on a healthy 6.9%. The S&P MidCap 400 jumped 6.4% while the Nasdaq posted a gain of 5.3%. The S&P 500 and the Dow Jones Industrial Average added 4.7% and 4.0% respectively.

Market internals were mixed. Volume declined on both exchanges. The Nasdaq and the NYSE saw drops in volume of 4.5% and 4.4% respectively. However, advancing volume significantly outpaced declining volume across the board. By the close the spread ratio stood at 32 to 1 in the Big Board and 17 to 1 on the Nasdaq in favor of up volume. Although yesterday's move was impressive it lacked institutional backing as is supported by the drop in volume. A follow-through day is sorely needed. The last time the market had back-to-back winning days was early July.

Before the recent market carnage the SPDR KBW Bank ETF (KBE) was already in a downtrend dating back to February of this year. Further, KBE was consolidating below its 50-day and 20-day moving averages both of which bearishly crossed below the 200-day MA in June. As the market sold off over the past two weeks, KBE also dropped below key support of $20.50 that was first tested in early November of 2009. A rally back above this mark and into the declining 20-day and 50-day moving averages could provide a potential short entry trigger for this ETF. We will be closely monitoring price and volume action over the next several days for a potential short entry.



The PowerShares India Portfolio ETF (PIN) has been in a downtrend for the past nine months. Since January of this year PIN has spent the majority of its time trading below its 200-day MA. On August 4 PIN lost support at $21.65. Now that PIN is below this support level and all three of its moving averages, we would expect significant selling pressure with every rally near these key marks. We are tracking this ETF closely for a possible short entry into resistance of the declining 20-day and 50-day moving averages.



As might be expected after two weeks of severe selling, the market found support and rebounded sharply yesterday. Nonetheless, the broad market now faces formidable resistance as it has lost support of its two-year uptrend line and now appears to be in a downtrend. The type of damage that was done to the market over the past two weeks is not quickly repaired. Therefore we now expect to find considerable selling pressure at former support levels and most profit opportunities on the short side of the market.

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.