Friday's trading brought the markets to their ugliest close in three weeks. The major indices gapped down at the open, rallied briefly and sold off sharply until 1:00 pm. The remainder of the trading day saw stocks struggle to close just above the session lows. The small-cap Russell 2000 led all indices in the selloff, as it closed down 1.7% on Friday. Both the Nasdaq and the S&P MidCap 400 dropped 1.5%, while the S&P 500 and the Dow Jones Industrial Average shed 1.2% and 0.8% respectively. For the week, the Nasdaq fell 2.4%, while the Dow and S&P 500 both lost 2.2%.

Friday's internals varied somewhat between the NYSE and the Nasdaq. Trading on the NYSE can be characterized as a distribution day. Volume on the NYSE was up 7.6%, and declining volume outpaced advancing volume by a factor of 8.8 to 1. The picture was not as clear on the Nasdaq. Nasdaq turnover dropped 17% during the session, while the ratio of declining to advancing volume was 4 to 1. It is likely that at least some of the drop in Nasdaq volume is attributable to lower turnover in CSCO day over day. Nonetheless, selling was strong today on both indices.

In recent newsletters the focus has at times shifted to the potential of a market reversal. However, we have not been placing short positions on the watchlist. Why? The broad market is still in an uptrend. Even weak ETFs, unless they are not highly correlated to the market, will begrudgingly move with the trend. They have relative weakness but it's still difficult to trade against the broad market. Distribution days, as measured by market internals, have yet to show the extremes necessary to signal a major trend reversal. Typically, the market needs to see three to five days of heavy distribution before for a trend reversal can occur. Only under such pressure can key support levels typically be breached, and trends reverse. Until this happens we are inclined to buy ETF's trading at all time highs (or 52 week highs) on pullbacks or purchase inverse ETFs that are not highly correlated t the market. There are times when it's best to plan ahead for the next entry. Patience is an important skill when the technical indicators suggest caution. It is unwise to manufacture trades.

The SPDR S&P Emerging Markets Small Cap ETF (EWX), meets the criteria described above. EWX recently broke to all time highs. It is now in the midst of a pullback into support. Both weekly and daily charts are provided below. Based on our technical trading methodology, EWX has not yet provided a buy signal. There are several possible buy set ups for EWX. A strong move or gap back above the 20-day MA is one possibility. Others include consolidation above/within the "support zone" (see charts) or a pullback to the trend line and/or the 50-day MA.





The PowerShares DWA Emerging Markets Tech ETF (PIE), may also provide a buy entry on this pullback. Notice the convergence of horizontal support, the trend line and the 50-day MA. A selloff into this "triumvirate" could present the perfect buying opportunity.



The JPMorgan Alerian MLP ETN (AMJ) has been in a powerful advance since April, 2009. AMJ has been one of the strongest performing ETFs over the past 52 weeks. Not only has AMJ been demonstrating relative strength to the market, but also to other very strong ETFs. Notice that AMJ is still well above its 20-day MA. Given the last few days of selling, very few ETFs share this resume. Although it is not drawn on the chart, a secondary trend line coincides with the 20-day EMA for AMJ. AMJ has broken the neckline of a head and shoulders pattern. A quick look at a 30-minute six day chart of this ETF suggests a projected drop to $35.90. The 20-day EMA coincides with this price level. We will be watching AMJ for a possible long entry trigger.



Each of the EFTs discussed in today's newsletter appear to be good buying opportunities. Nonetheless, we have not placed any of them on the watchlist. It is generally advisable to wait for the set up to develop, and only enter the trade based on analysis of the position at that time. Many conditions can change between the time a trade is recognized as a setup, and the time the trade triggers. Information such as broad market activity, price action and volume action play a big role in the decision process. Our trading rules require that we wait.

As a reminder, we are in options expiration week.

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.