Stocks followed through on the previous session's bullish reversal attempt with an impressive round of gains yesterday (April 1).

The bullish recovery was led by the NASDAQ Composite (for a change), which enabled the tech-dominated index to reclaim both is 20 and 50-day moving averages (the sibling NASDAQ 100 did so as well).

More importantly, higher volume accompanied yesterday's advance, enabling the NASDAQ to score its first confirmed accumulation day in more than a month.

The Russell 2000 is also is back in business, as the small-cap index closed above both its 20 and 50-day moving averages as well.

Below are daily charts of the NASDAQ Composite and Russell 2000 that show the technically significant improvements:





Why Moving Averages Matters

Moving averages play a very important role in our daily analysis of the overall stock market.

Aside from price and volume, moving averages are one of the most important indicators of our trading strategy.

In bull markets, the 50-day moving average is our pivotal "line in the sand." During corrections and pullbacks, the main stock market indexes must hold onto this level in order for us to continue operating on the long side of the market with confidence.

When the major averages subsequently get back above their 20-day exponential moving averages and hold, we can then get excited about new long setups because the potential for a new uptrend (or resumption of the previous uptrend) increases.

Overall, we can step on the gas pedal again when all the major indices move back above their 20 and 50-day moving averages (and hold for more than a day or two) after a substantial correction.

Divergent Stock Market Indexes

While this week's price action was certainly a step in the right direction (so far), both the NASDAQ and Russell 2000 are now in "no man's land" because the indexes are back above resistance of their 20 and 50-day averages, yet still must contend with resistance of their prior highs and short-term downtrend lines that have formed.

On the other hand, the benchmark S&P 500 rallied to a fresh all-time high yesterday, as higher volume confirmed the move as well.

Although the S&P 500 corrected alongside of the NASDAQ last month, the retracement off the highs was relatively shallow (less than a 38.2% Fibonacci retracement):



Both the Dow Jones Industrial Average and S&P Midcap 400 indices did not close at record highs yesterday, but still managed to record new closing highs for the year.

The breakout to new highs in the S&P 500, along with yesterday's higher volume recovery in the NASDAQ and Russell 2000, was enough to put our stock market timing model back into "neutral" mode (previously in "sell" mode since March 21).

If the NASDAQ manages to finish above its 50-day moving average this week, our market timing system may shift back to a "buy" signal (subscribers of our nightly trading newsletter will be instantly notified if/when we re-enter "buy" mode).

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.