Stocks were obliterated on Wednesday as volume surged. The markets sold off sharply at the open, rallied modestly at the 11:00 am reversal period and spent the remainder of the day in a downward spiral. All five major indices opened at the high and closed near the dead lows of the day. Support levels were shredded across the board. By the closing bell four of the five major indices had closed below their respective 50-day moving averages. The small-cap Russell 2000 led the plummet as it lost a whopping 3.0% yesterday. The S&P MidCap 400 and the Nasdaq plunged 2.8% and 2.7% respectively. The S&P 500 fell 2.0% while the Dow Jones Industrial Average showed the most resiliency but still shed over 1.5% on the session.

Day over day market internals went from bad to abysmal. Volume surged by 35.0% on the Nasdaq and 27.5% on the Big Board. Declining volume overwhelmed advancing volume by a factor of 16 to 1 on the NYSE and 11 to 1 on the Nasdaq. Institutional investors were clearly seeking refuge from the stock market as the day's selloff resulted in over 600 stocks dropping 4% or more in value. Wednesday was both a follow-through and a distribution day for the market.

Given the breadth of yesterday's selling, a review of major indices is in order. Following powerful advances or declines in the broad market it is generally a good idea to take a step back and identify key support and resistance levels in order to plan for the next possible trading opportunities. A quick glance at the follow charts of the S&P 500, Nasdaq, Dow Jones Industrial Average, S&P MidCap 400 and small-cap Russell 2000 provides important information about support and resistance levels on each of these indices (dashed horizontal blue lines) . Notice the size of the reversal candles (highlighted in light blue) as each index failed to break above key resistance. When a stock, index or ETF forms a massive reversal candle it will often mark an intermediate or long term top/bottom.











It is also noteworthy that leadership stocks and ETFs began showing relative weakness over the past two sessions. When a market is under pressure, the good often gets thrown out with the bad. For example, strong sectors such as retail (XRT), biotechnology (IBB), medical devices (IHI) and pharmaceuticals (PPH) have come under severe selling pressure in the past two days. In yesterday's newsletter we even mentioned XRT as a possible long candidate. Needless to say, XRT sold off sharply yesterday. When long-term leaders become laggards it is not usually a good sign for the broad market.



Until yesterday the pundits were claiming that the market was not overly concerned about the debt and deficit debate in Washington. With yesterday's dismal performance now on the books, maybe this can serve as a catalyst to prompt Washington to find a resolution a little bit quicker.

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.