Stocks closed near session highs yesterday but on light trade. Smaller cap stocks led the move with the small-cap Russell 2000 and the S&P MidCap 400 adding 3.3% and 2.9% respectively. The Nasdaq tacked on 2.4% while the S&P 500 climbed 1.3%. The Dow Jones Industrial Average was the laggard on the day as it only managed to post a 0.9% gain.

For a second consecutive day market internals were mixed. Volume plunged by over 20.0% on the Nasdaq but slid by a more moderate 5.3% on the NYSE. However, advancing volume topped declining volume by 6.6 to 1 on the NYSE and 9.4 to 1 on the Nasdaq. Although the market raced higher yesterday, the weak market internals suggest that institutional players were on the sidelines.

A quick review of the major indices that we track clearly demonstrates that the entire market is approaching key resistance. Notice that the Nasdaq has exhibited the most relative strength during this rally as it is the only major index to have reached its 200-day MA. Also notice that both the S&P 500 and the Dow Jones Industrial Average are within striking distance of their respective 200-day moving averages. However, the S&P MidCap 400 and the small-cap Russell 2000 are showing relative weakness as both are well below their 200-day moving average.











Despite our shift to a moderately bullish view of the market recently, several key momentum indicators that we follow are signaling that the market is approaching an overbought state. Further, we are approaching major resistance levels on all of the major indices. Therefore, caution on the long side of the market is warranted in the short run.

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.