Stocks sold off sharply on Tuesday as volume surged. All five major indices closed in the red, with the Nasdaq leading the carnage. The technology rich index plummeted 2.7% for the session. The S&P MidCap 400 and the small-cap Russell 2000 sank 2.4% and 2.5% respectively. The S&P 500 fared slightly better but still lost just over 2.0% yesterday. The blue chip Dow Jones Industrial Average was the only index to fall less than 2.0%, as it ended the day 1.4% lower.

Market internals were convincingly bearish on Tuesday. Volume was up across the board. Turnover on the Big Board skyrocketed 13%, while volume on the Nasdaq was higher by almost 7.0%. Declining volume overwhelmed advancing volume by a ratio of 11 to 1 on the NYSE and 19 to 1 on the Nasdaq. Tuesday was clearly a distribution day on Wall Street.

Yesterday, we entered the ProShares UltraShort MSCI Brazil ETF (BZQ) on a pullback into its 20-day EMA. On a powerful, high volume reversal day the odds were in our favor to take a position on the short side of the market. The setup in BZQ was particularly appealing because this ETF gapped up on strong volume, reversed and filled the gap on lighter volume and then rallied back above the opening gap to close near the high of the day. Yesterday's price and volume action in BZQ resulted in a distinct reversal candle and should result in further upside.



The ProShares Short MSCI Emerging Markets ETF (EUM) gapped up and formed a significant reversal candle yesterday. After a sharp move it is not unusual for an ETF to consolidate for a few days and/or pull back to a former resistance level before advancing further. A retracement back to support (former resistance) near $32.00 may offer a buying opportunity for this inversely correlated ETF. An alternative entry could present itself above Tuesday's high.



Tuesday's reversal proved timely in light of our commentary in yesterday's newsletter. We were reasonably confident that a big distribution day was near, but there was no way to know that we would see such a sharp reversal this proximate to our analysis. We anticipate further selling for several days, but by no means has the market reversed the primary trend. For the moment, short opportunities appear to be abundant, while most long setups have been nullified. Now that volatility is back in the game, caution is warranted particularly on the long side of the market.

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.