Thursday brought a volume fueled wave of selling to Wall Street, as all five major indices ended the session well in the red. The small-cap Russell 2000 led the market decline, as it fell 2.5% yesterday. The Nasdaq, Dow Jones Industrial Average, S&P 500 and the S&P MidCap 400 all plummeted by 1.9%. The S&P MidCap 400 was the only major index to close above its 50-day MA.

Market internals were definitively negative on Thursday. Turnover spiked by 19% on the Nasdaq and 28% on the NYSE. Declining volume was substantially greater than advancing volume on both indices. The ratio of declining to advancing volume was a bearish 12 to 1 on the NYSE and a negative 5.2 to 1 on the Nasdaq. Thursday was a clear distribution day for the broad market.

The S&P Select Financial SPDR ETF (XLF) is testing a critical support level just below its 50-day MA. A drop below March 3nd low of $16.33 could serve as a short trigger for this ETF. For those who are unable to short ETFs, the inversely correlated Proshares Ultrashort Financials ETF (SKF) would serve as a reasonable proxy to shorting XLF. XLF is not an official setup but we are watching it closely for a possible short entry.

 
The ProShares UltraShort QQQ ETF (QID) made a powerful reversal move yesterday and closed above its 50-day MA for the first time since August 2010. A move above yesterday's high of $54.28 may provide a long entry in QID. We will be watching carefully for an intraday entry for this ETF.

 
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.

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.