Stocks gapped significantly higher on the open and spent the remainder of the session giving back those gains and more. The steady dose of selling intensified late in the day and did not let up until the last fifteen of minutes of trading. The afternoon plunge may have produced a bit of a washout effect in the Nasdaq Composite, as the price action undercut an obvious three-day low before reversing in to the close. Small-cap and tech stocks were hit the hardest with the Russell 2000 and Nasdaq Composite losing 1.0% and 0.9% respectively. The S&P Midcap 400 shed 0.8%. The S&P 500 gave back 0.4% and the Dow Jones Industrial Average lost 0.1%.

Total volume failed to confirm the ugly price action. Nasdaq volume sank 9% while NYSE volume lagged by 29%. Although it would have been difficult for volume to outpace Friday's "quadruple witching" level, yesterday's turnover on both exchanges was below the 50-day moving average of volume and lighter than every session last week. The light volume selloff allowed the major averages to avoid an official distribution day.

Per yesterday's intraday email alert, we sold THD into strength of the morning gap up at 49.00. We'll continue to monitor THD for a low-risk entry point on a pullback due to its great relative strength vs. the S&P 500 (detailed on the weekly chart below):



We made a judgment call to sell THD and lock in gains as it approached resistance of the prior high. With a little consolidation and patience, we may see a low-risk buy entry develop at or near the rising 20-day EMA within the next week or two (as long as the price & volume action in the broad market averages remains healthy).



Yesterday's false breakout above the downtrend line in Vanguard REIT (VNQ) could lead to a nice washout over the next few days. We would view any short-term selloff as a positive if the price action holds above the 49.00 area. If this pattern is ready to push higher then it should recover quickly from a potential three to five bar selloff and close back above the downtrend line.



To gain perspective on leadership stocks, lets take a look at the weekly chart of the small-cap Russell 2000:



We see strong support at the lows, as the price action did not close below the 40-week moving average during the correction. One could bring up a weekly chart of the S&P 500 and see the price action close below the 40-week week MA several weeks in a row. We also see that the Russell is trading back above the highs of January 2010, while the S&P 500 is clearly still below it. The price appears to be carving out the cup portion of a potential cup and handle pattern. We are still waiting for confirmation in the form a convincing surge through the 10-week moving average before turning bullish.

Open ETF positions:

Long - UNG
Short (including inversely correlated "short ETFs") - USO

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.