All five major indices closed down on Wednesday. The session opened flat and stocks rallied until the 11:00 am reversal period. The market spent the remainder of the day in a stair step descent. The S&P 500 and the S&P MidCap 400 both shed 0.5% on the day. Following closely were the Nasdaq and the small-cap Russell 2000. Each dropped by 0.4%. The blue chip Dow Jones Industrial Average incurred the least damage, as it closed down by only 0.2% yesterday.

Market internals were moderately bearish yesterday. Wednesday brought a divergence in volume between the two indices. Volume on the NYSE spiked by an impressive 10%, while the Nasdaq saw a small decrease in turnover of 0.9%. However, declining volume was greater than advancing volume on both indices. On the NYSE down volume outpaced up volume by a factor of 3 to 1, while declining volume was greater than advancing volume on the Nasdaq by a ratio of 2 to 1.

The Market Vectors Brazil Small-Cap ETF (BRF) is now testing support at the neckline of a head and shoulders pattern for the fourth time in the past month. Each test has been on very high volume. A break below the November 16 low of $57.10 marks a possible short trigger for this ETF. It is important to be aware of the minor support level at $56.00 (see daily chart). This price level marks a key support level on the weekly chart of BRF (20-week EMA). If the neckline of this head and shoulders pattern is broken, a sharp bounce could occur at this level. A close below the 20-week EMA would be further confirmation that the head and shoulders pattern is valid, and increase the odds that the predicted target would be met.







The SPDR S&P China ETF (GXC), is under pressure at an important support level. Yesterday this ETF gapped down, undercut support and closed near the lows of the day. A volume charged drop below yesterday's low of $76.53 offers a potential short entry trigger for GXC.




For several sessions now, the broad market has been casting mixed signals. A subtle bearish tone seems to be overhanging the market. Yet, all the major indices remain in an uptrend and the price action suggests consolidation. But leading ETFs appear to be losing relative strength and market internals have been poor. We are also seeing market laggards taking leadership roles (often a bearish signal). When mixed signals abound, it's generally best to take a protective stance. This may include tightening stops, reducing position size and/or hedging with both long and short positions. Regardless, caution is warranted.

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.