Bad news out of Dubai over the Thanksgiving holiday caused U.S. stocks to open sharply lower last Friday, but the "buy the dip" traders stepped in, enabling the broad market to finish well above its worst level of the day. After gapping down to open nearly 3% lower, the major indices immediately reversed and drifted higher throughout the holiday-shortened session. Another round of selling in the final hour of trading caused the main stock market indexes to surrender some of their intraday progress, but the closing losses were still less than those realized in other global markets. The Dow Jones Industrial Average fell 1.5%, while the S&P 500 and Nasdaq Composite both plunged 1.7%. The small-cap Russell 2000 and S&P Midcap 400 indices lost 2.5% and 2.0% respectively. The S&P and Dow finished near the bottom third of their intraday ranges. The Nasdaq settled just above the middle of the day's range.

Total volume in the NYSE was 17% lighter than the previous day's level, as trading in the Nasdaq registered 30% lower. Considering it was a holiday-shortened session that closed three hours early, it's not surprising that volume levels were lighter than the prior day. However, compared to Wednesday's turnover as of 1:00 pm ET, when the markets closed early, volume was indeed tracking sharply higher. Therefore, if it was a full session of trading, stocks would likely have suffered a bearish "distribution day." As such, it's still accurate to say Friday's session was marked by institutional selling across the board. Extremely ugly market internals confirmed the distribution. In the NYSE, declining volume trounced advancing volume by a whopping margin of more than 30 to 1. The Nasdaq adv/dec volume ratio was negative by 10 to 1. This tells us the selling was broad-based, reaching into nearly every industry sector.

While last Friday's sell-off was initially sparked by news, the decline coincided with the CBOE Volatility Index ($VIX) coming into support of its prior "swing low" from October. The $VIX, a technical indicator commonly referred to as the "fear index," typically moves inversely to the direction of the stock market. On the daily chart below, the dashed horizontal line illustrates how the $VIX kissed support of its prior low last Wednesday, before gapping sharply higher in Friday's session:



It was on October 21 that the $VIX last touched the 20 level (circled in pink). As you may recall, that coincided with the start of a two-week correction that caused the major indices to test and "undercut" their 50-day moving averages. Because it's primarily an indicator we use for confirmation of our analysis, rather than an indicator that directly prompts us to enter specific trades, we rarely discuss the $VIX. Nevertheless, it's notable that the $VIX is apparently hammering out a base of support around the 20 level. With the last touch of the 20 level leading to a two-week correction in the broad market, it's certainly something to prevent the bulls from getting complacent. Likewise, when the $VIX approaches the 30 - 32 area, it could be a confirming indicator that the market has become short-term oversold. The last "swing high" of the $VIX, on November 2, coincided with the stock market's most recent bottom.

Financials were the hardest-hit sector last Friday, as investors pondered over the direct and indirect effects of the Dubai World news amongst the banks and brokers. The iShares U.S. Securities Broker-Dealers Index (IAI) has already fallen to test support of its prior "swing low" from November 2. We recently pointed out the relative weakness in IAI, as well as its inability to get back above the 50-day MA, and suggested the ETF would likely show downside leadership whenever the broad market eventually pulled back. That's what has happened so far. On the daily chart of IAI below, notice that last Friday's decline occurred on nearly four times its average daily volume, despite the shortened session:



The Regional Bank HOLDR (RKH), which we've been short since November 12, gapped down to break support of a five-month uptrend line last Friday. On any recovery attempt this week, expect prior support of that uptrend line to now act as resistance. The same is true of the S&P Financial SPDR (XLF), which has a similar pattern to RKH. The break of trendline support is shown on the chart of RKH below:



The main stock market indexes have been in a choppy, sideways range for the past two weeks, and last Friday's losses puts the major indices near the lower channel support of that trading range. Unless we see a break of Friday's lows, or a rally above last week's highs, the short-term trend of the broad market will continue to be range-bound. As such, entries into new positions, either long or short, could be tricky right now. Now that the holiday has passed, it will be interesting to see the stock market's real reaction to the Dubai news in today's session. A complete recovery of last Friday's losses would be quite bullish, and not out of the question. However, there still may be a lot of overhead supply above current levels, the direct result of traders who went long in anticipation of typical holiday strength. We'll lay low in today's session, focusing only on managing existing positions, and provide a fresh re-assessment of the situation tomorrow.

Open ETF positions:

Long - FCG, DAG
Short (including inversely correlated "short ETFs") - TWM, RKH

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.