Our suspicions concerning Monday's light volume gains were validated yesterday, as the broad market averages produced yet another day of heavy volume distribution. Stocks opened significantly lower on Tuesday, which led to a brutal morning session with most averages down more than 2% within the first hour and a half of trading. By 12:30, the small and mid-cap averages along with the Nasdaq Composite had dropped more than 3%. The price action stabilized in the afternoon and chopped around until the close. Aside from a bullish dollar (UUP gained 1.4%) there was no place to hide (even gold and silver were in sell mode). The small-cap Russell 2000, Nasdaq Composite, and S&P Mid-Cap 400 all plunged 3%. The S&P 500 dropped 2.4%, while the Dow Jones Industrial Average gave back 2%.

Turnover picked up dramatically on both exchanges with Nasdaq volume climbing 29% higher vs. 28% on the NYSE. Yesterday was the fourth big spike in volume to correspond with a substantial decline in the S&P 500 over the past few weeks. NYSE down volume beat up volume by a huge 15 to 1 margin. Nasdaq down volume was also very strong, as it beat up volume 12 to 1.

The S&P 500 found support at the 50-day MA yesterday. This is an obvious support level, so we may see some sort of one or two bar shakeout that dips below the 50-day MA before the market bounces higher.



The 50-day MA should act as a magnet in the Nasdaq today, as we also expect the price action to undercut the 50-day MA.



While running our scans last night, we noticed quite a bit of technical damage on the daily charts, as there are fewer and fewer bullish patterns to be found. One such group that has quickly fallen out of favor this year is the emerging market ETFs, which led the market higher in 2009. China was very hot a few months ago, with many stocks making spectacular runs of 50 to 100% in two months or less. Now the iShares Xinhua China 25 (FXI) is falling apart below the 200-day MA:



The Market Vectors Russia (RSX) failed a recent breakout to new 52-week highs and was attempting to find support at the 50-day MA before yesterday's nasty gap down on heavy volume.



The iShares Brazil (EWZ) showed its relative weakness by failing to rally above the prior swing high this year along with the S&P 500. Note the heavy volume breakdown at point A (50-day MA) and point B (200-day MA).



Let's end today's charts on a positive note with the iShares Nasdaq Biotech Fund (IBB). Note the tight ranged price action at the highs, as it holds support of the rising 10-week MA. Whether or not this pattern will hold up during a deeper retracement in the broad market remains to be seen, but we'll keep it on our constructive pattern watchlist for now.



The first bounce off the lows in the broad market averages should present us with low-risk short entry points, as ETFs rally in to prior support levels that have turned into resistance. We remain fully in cash and waiting for new setups to emerge.

Open ETF positions:

Long - none
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.