Stocks sold off at the open and chopped around for most of the day. However, a late day flurry of buying propelled equities to session highs. By the closing bell all five major indices were solidly in the black. The Nasdaq continued to show relative strength to the broad market as it ended the session up by 1.1%. The small-cap Russell 2000 climbed 0.8% while the S&P 500 added 0.7%. Both the Dow Jones Industrial Average and the S&P MidCap 400 tacked on 0.6%.

Market internals ended the day mixed. Volume fell on the Nasdaq by 3.4% and on the NYSE by 8.5%. Advancing volume modestly outpaced declining volume by a factor of 1.3 to 1 on the NYSE and 2.7 to 1 on the Nasdaq. Despite the positive price action, the weak volume suggests that institutions were not involved in Monday's rally. The market has spent a lot of time churning lately and this is generally not a good sign for bulls.

Given yesterday's reversal, an overview of the major exchanges is warranted. Notice how the Nasdaq ($COMPX) and in particular the Nasdaq 100 ($NDX.X) have been showing relative strength to the broad market recently. As the S&P 500, NYSE and DJIA have been testing their respective swing lows, the Nasdaq and Nasdaq 100 have been setting higher lows. This suggests that money is rotating into the large cap Nasdaq stocks and provides an explanation for our observation in Monday's newsletter when we said, "...not all leaders have broken down as AAPL, PCLN and AMZN have all held support over the past six weeks. However, if these remaining hold-outs begin to crack then we would anticipate another significant round of selling in the broad market". It is important to note that the S&P, DJIA and NYSE all tested key support for the fourth time and held these levels yesterday. Consequently, we would not be surprised to see a rally over the next few days. However, we will be watching the volume carefully since it has tended to be weak on positive days in the market lately. If the market bounces in the absence of accumulation days, it is likely that we will be facing another leg down as a fifth test of major support is not likely to hold.



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The light volume brings into question the strength of yesterday's rally but the reversal candles formed on the major indices cannot be ignored. In the absence of institutional participation late day buying in the wake of a morning selloff can often be attributed to short covering. Still, the market is giving us mixed messages and we would not be surprised to see the market put together a significant rally. Consequently, we prefer to sit in cash, monitor the market carefully and wait for new setups to form.

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.