The previous day's "hanging man" candlestick pattern in the S&P 500 followed through yesterday, as the major indices moved lower across the board. Stocks gapped lower on the open, sold off further at mid-day, then closed near the bottom third of their intraday ranges. The Dow Jones Industrial Average only lost 0.3%, but continued relative weakness in the Nasdaq Composite caused the index to slide 1.3%. The benchmark S&P 500 fell 0.9%. Like the Nasdaq, both the small-cap Russell 2000 and S&P Midcap 400 indices tumbled 1.3%.

Total volume in the NYSE swelled 13%, while turnover in the Nasdaq rose 15% above the previous day's level. The higher volume losses caused both the S&P and Nasdaq to register a bearish "distribution day," indicative of institutional selling. In both exchanges, trading registered above average levels. In the Nasdaq, volume was the highest level in nearly a month. Market internals were firmly negative. Declining volume in the NYSE exceeded advancing volume by a margin of nearly 5 to 1. The adv/dec volume ratio in the Nasdaq was negative by 3 to 1.

In yesterday's commentary, we said of Monday's pattern in the S&P 500, "While a 'hanging man' certainly does not guarantee the market will follow-through with a significant pullback in the coming days, it is still a valid reason for the bulls to tighten stops and consider holding off on entering new long positions (other than commodity, currency, or other ETFs with a low correlation to the direction of the stock market direction)." Yesterday's sell-off that followed confirmed our thoughts. Now, the stock market is at least entering a short-term pullback mode which could yield fresh buy entries on the retracement. Better reward-risk ratios are the benefit of a significant pullback in the market. Following are a few charts of strong ETFs we're stalking for potential pullback buy entry in the coming days. We suggest adding these to your watchlist, and we'll keep subscribers updated based on subsequent price action:









We concluded yesterday's newsletter by saying, " To recap, the two ways we like to enter on pullbacks are: 1.) Waiting for the first rally above the hourly downtrend that follows a pullback to a key level of price support 2.) Buying an "undercut" of an obvious level of support, especially if more significant support is just below that price. With this second method, remember the importance of getting out quickly if the "undercut" does not rebound within a matter of days." Over the next week, we'll be monitoring the above ETFs, looking for possible buy entries as per these methods. If any of these ETFs meet our buying criteria, we'll promptly send an Intraday Trade Alert to subscribers, detailing our trade entries.

Open ETF positions:

Long - XLE, UUP
Short (including inversely correlated "short ETFs") - (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.