Following through on the previous day's moderate weakness, the major indices logged a second straight session of losses. This time, the decline was much more substantial, and the pace of trading picked up as well. Stocks opened slightly lower, sold off throughout the first half of the day, then unconvincingly attempted to recover in the afternoon. The Dow Jones Industrial Average slid 1.0%, the Nasdaq Composite 1.1%, and the S&P 500 1.3%. Small and mid-cap stocks showed the most relative weakness, as the Russell 2000 fell 1.7% and the S&P Midcap 400 lost 1.4%. Because the afternoon rally attempt fizzled out in the final minutes of trading, the main stock market indexes closed around the bottom quarter of their intraday ranges.

Total volume in the NYSE rose 10% above the previous day's level, while volume in the Nasdaq increased 3%. The losses on higher volume caused both the S&P 500 and Nasdaq Composite to register a bearish "distribution day." For the Nasdaq, it was the third such instance of institutional selling in recent weeks. The S&P 500 has had only two days of higher volume losses during the same period. Since more than three "distribution days" within a period of several weeks often precedes a substantial correction in the market, be on the lookout for any more instances of higher volume losses in the Nasdaq. In the NYSE, declining volume exceeded advancing volume by a ratio of 4 to 1. The Nasdaq adv/dec volume ratio was negative by more than 3 to 1.

If the major indices start to build on their losses of the past two days, we may finally get a decent price correction in the broad market. In the event of any further losses, there are two key areas of support to keep an eye on. First are the 20-day exponential moving averages, accurate indicators of short-term support or resistance. The second support level that may come into play is the prior highs from June of 2009. This is shown on the daily chart of the S&P 500 SPDR (SPY), a popular ETF proxy for the S&P 500 Index:



The 20-day EMA of SPY (the beige line) is presently at $97.91 (977.7 for the actual S&P 500 Index). Below that, the dashed horizontal line marks new support of the prior highs from June of 2009, around the $95.50 to $96 area. The prior highs from June act as support because basic technical analysis states a prior level of resistance becomes the new level of support, after the resistance is broken. Therefore, in the event of further correction in the broad market, one might expect the S&P 500 to find significant buying support between the area of its prior highs from June and its 20-day EMA. Traders and investors who did not participate in the July rally will most likely be interested in buying if the S&P provides such an ideal pullback.

In yesterday's commentary, we pointed out the potential buy setups in both the Semiconductor HOLDR (SMH) and iShares Nasdaq Biotech (IBB). Because of broad-based weakness, neither setup moved above the trigger price for buy entry. However, both ETFs showed a bit of relative strength by closing above the previous day's lows. As such, we continue stalking these ETFs for potential buy entry today, based on the technical parameters explained in yesterday's Wagner Daily.

Today, at 2:15 pm ET, the Federal Open Market Committee (FOMC) will announce their latest stance on interest rates and economic policy. While no change to the federal funds rate is expected, traders will be focused on whether or not Fed commentary suggests a continued loosening of monetary policy going forward. Traders may also be expecting a statement regarding whether or not the Fed will continue its program of long-term bond buying. As always, the knee-jerk reaction to today's Fed announcement will likely lead to volatile and erratic price action in the late afternoon session.

Open ETF positions:

Long - DGP, DBO, FXB
Short - (none)

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.