Monday was a very difficult day for Wall Street. Stocks got pummeled yesterday as volume increased. All five major indices closed decisively lower and near session lows. The market was under duress for most of the day. The small-cap Russell 2000, S&P MidCap 400 and Nasdaq slid by 2.3%, 2.2% and 2.0% respectively. The S&P 500 met a similar fate as it dropped by 1.8%. Although hardly respectable, the Dow Jones Industrial Average fell a lesser 1.2% yesterday.

Market internals were quite bearish on Monday. Volume rose by 10.3% on the Nasdaq and 8.2% on the NYSE. Further, the spread between declining and advancing volume was huge. On the NYSE the ratio of declining to advancing volume ended the session at a stunning 30 to 1. The Nasdaq did not fare much better as the spread ratio finished at 11 to 1 in favor of declining volume. The combination of declining prices and decidedly negative internals points directly to significant institutional distribution yesterday.

Yesterday, the iShares MSCI Italy Index ETF (EWI) gapped down to break both its 3-day low and recently formed uptrend line. EWI now offers significant downside potential on a bounce back into resistance near the downtrend line. Another factor contributing to EWI's weakness is the down trending 200-day MA. It is generally ill-advised to purchase securities that are trading below a down trending 200-day moving average. We are carefully monitoring EWI for a potential short entry into resistance.



During the recent eight-day uptrend, the iShares Dow Jones Transportation Index ETF (IYT) showed excellent relative strength as it rallied to a new 52-week high. Over the past three days this ETF has reversed with the market but now is trading near support of its 20-day EMA and 50-day MA. An undercut of this key support area followed by several days of consolidation may present a buying opportunity in this fund.



Given yesterday's follow-through selloff, it is clear that the market has met significant resistance near the 52-week highs. European ETFs are under major duress as they have for the most part lost support of their respective 200-day moving averages. When markets turn abruptly it often becomes quite difficult to find either long or short trades that provide reasonable risk/reward entries. Consequently, it prudent to reduce share size and/or to avoid entering new positions until the volatility subsides.

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.