Stocks reversed dramatically on Tuesday and turned early losses into significant gains. All five major indices roared higher on brisk trade. The small-cap Russell 2000 mounted an impressive rally as it tacked on a whopping 6.4%. The S&P MidCap 400 gained 3.5% while the Nasdaq forged ahead 3.0%. The S&P 500 and the Dow Jones Industrial Average posted increases of 2.3% and 1.4% respectively.

Market internals ended the session on a bullish note. Volume surged on the NYSE by 25.0% and on the Nasdaq by 19.1%. Advancing volume overwhelmed declining volume by 5.8 to 1 on the NYSE and 8.1 to 1 on the Nasdaq. Based on the abrupt and convincing nature of the rally, it is likely safe to say that institutions stepped back into the market with authority yesterday. A move that powerful was fueled by much more than just short covering.

We sold the remaining shares of EFZ yesterday morning into the gap up. We are now up almost 1.5% for the month and will now wait for new setups to reveal themselves. The volatility of yesterday's reversal provides a clear warning that we should step back from the market for at least a few days. We're glad to be in cash.

Sometimes a picture speaks a thousand words. Yesterday, amidst apparent carnage, the market staged a dramatic reversal and now appears to have established a bottom. If yesterday's low holds over the next three to five sessions we anticipate a four to six-week rally in the S&P 500 with the possibility of a move back to the 200-day moving average.





In yesterday's newsletter we discussed market timing and stated, "This is why it's important to identify and be in quality setups before the big break. Once the break occurs it's too late. This is where novice traders begin chasing the market lower only to get demolished when the market reverses higher. The late afternoon bounce (Monday) was likely the result of short covering by professionals into the close. That suggests that retail traders were responsible for the decline in the last 20 minutes of the day. As the professionals were getting out, the amateurs were getting in". These words proved to be prophetic as the market smashed any late-to-the-party bears yesterday. Market timing and trade management are critical to successful stock trading and these skills are at a particular premium in a bear market. As we said yesterday," bear market reversals are viscous and it's best to be out of the market well ahead of the turn."

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.