Strength in the tech stocks enabled the Nasdaq to lead a broad-based rally yesterday, but lower volume levels in both exchanges failed to confirm the follow-through. The Nasdaq Composite, aided by a 2.3% gain in the Semiconductor Index, trended steadily higher throughout the session before finishing with a solid 1.9% gain. The S&P 500 and the Dow Jones Industrial Average both lagged behind, closing higher by 1.2% and 0.8% respectively. Small cap stocks showed relative strength for the second consecutive day, as the Russell 2000 Index jumped 2.2%. The S&P Midcap 400 rallied 1.5%. Each of the major indices closed at their intraday highs.

Yesterday's gain in the Nasdaq was certainly a positive way to start the new month, but one problem is that total volume was 4% lighter than the previous day's level. In the NYSE, total volume declined by 15%. Given that the Nasdaq posted such a large percentage gain, higher volume should have also accompanied the rise, as it would have confirmed that institutions were behind the move. Instead, turnover fell across the board and was only on par with average volume levels. Nevertheless, market internals were pretty good. In the Nasdaq, advancing volume exceeded declining volume by a margin of 3 to 1, while the NYSE ratio was positive by 5 to 1.

For the first time since the broad market selloff began on May 11, a handful of individual stocks broke out above their bases of consolidation yesterday. More than 100 stocks also posted new 52-week highs, another sign that pockets of strength were abound. However, the charts of the major indices and individual industry sectors show that we are definitely not "out of the woods" yet. Looking forward, the biggest challenge will be the Nasdaq's overhead resistance of its 200-day moving average. As you can see on the daily chart below, the index will likely test resistance of its 200-MA in today's session:



A lot of overhead supply was created by the Nasdaq's massive slide last month and, as such, it is likely to have a bit of difficulty at recovering back above its 200-day moving average. Also, despite yesterday's 1.9% gain, the Nasdaq only closed at its 38.2% Fibonacci retracement of its most recent downward move. For this reason, we can't get too excited about the Nasdaq right now, although there are a few individual stocks that may stealthily advance even if the Nasdaq goes sideways.

The S&P 500 has now retraced 50% of its slide, but closed right at resistance of its prior low from April. Resistance of the 20-day moving average is also right overhead. The dashed horizontal blue line on the daily chart below marks the prior low from April:



Although individual stock traders may now find a few opportunities on the long side, our overall bias on the equities ETFs remains negative until the major indices prove they can recover above some key resistance levels. More importantly, we need to see confirmation that institutional accumulation has returned, something that has been lacking throughout most of the broad market's recovery off the lows. The Biotech HOLDR (BBH | Quote | Chart | News | PowerRating), which we discussed in yesterday's newsletter, broke out above its 50-day MA and is one exception that may find a bit of upside follow-through. Also keep an eye on the Utilities sector; both the S&P Select Utilities SPDR (XLU | Quote | Chart | News | PowerRating) and the Utilities HOLDR (UTH | Quote | Chart | News | PowerRating) are poised to rally above their prior highs, though both are below their 52-week highs.

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Deron Wagner is the head trader of Morpheus Capital Hedge Fund and founder of Morpheus Trading Group (morpheustrading.com), which he launched in 2001. Wagner appears on his best-selling video, Sector Trading Strategies (Marketplace Books, June 2002), and is co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. He is also a frequent guest speaker at various trading and financial conferences around the world. For a free trial to the full version of The Wagner Daily or to learn about Deron's other services, visit morpheustrading.com or send an e-mail to deron@morpheustrading.com.