Stocks edged lower on Wednesday on mixed volume. Four of the five major indices closed down on the day. The Dow Jones Industrial Average was the sole holdout, as it managed to close at the flatline. The small-cap Russell 2000 led the decline as it fell 0.7% yesterday. The Nasdaq shed 0.5%, but of greater significance was the inability of the tech rich index to close above the 20-day EMA. Further, it was the only index to close below all three moving averages on the 60-minute chart (20, 50 and 200 day moving averages). Yesterday's sharp selloff in the semiconductor sector has placed the Nasdaq under significant pressure. The S&P MidCap 400 and the S&P 500 finished the session down by 0.1% and 0.2% respectively.

For the second consecutive session market internals were mixed. Volume was higher on the Nasdaq by 9.3% but lower on the NYSE by 11%. Declining volume was greater than advancing volume by a factor of 2 to 1 on the Nasdaq and 1.1 to 1 on the NYSE. Based on both price and volume action, Wednesday would be classified as a distribution day for the Nasdaq.

We entered Wednesday with no open positions and no watchlist candidates. For the moment, we prefer to be in cash due to the lack of follow through in the market.

In yesterday's newsletter we commented that, "The iShares MSCI Turkey Investable Market Index ETF (TUR) has been in a "stair step" downtrend since November of 2010. A rally back into the downtrend line or the 50-day MA could provide a short entry for this ETF". Yesterday, TUR gapped up for the second consecutive day and then stalled at the downtrend line. We will be closely monitoring the price and volume action in TUR for a potential short entry.

 
The semiconductor sector may hold the key to the next big move in the market. Yesterday, on a massive spike in volume, the Semiconductor HOLDRS ETF (SMH) gapped down and sold off to close near the session lows. A move back above the 50-day MA followed by a sharp reversal could present a short entry for this ETF.

 
The Nasdaq is beginning to exhibit signs of weakness and we are paying close attention to its price and volume action. The Nasdaq is generally considered to be a leading indicator for the broad market. The Nasdaq has now come under institutional distribution six times in the past ten sessions.

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.