Wall Street took a beating on Tuesday as stocks plummeted on brisk trade. Four of the five major indices shed over 2.5% on the session. Higher beta issues led the decline. The small-cap Russell 2000 and the S&P MidCap 400 dropped a whopping 3.3% and 3.0% respectively. The Nasdaq followed closely as is shed 2.75%. The S&P 500 plunged 2.6% as the Dow slid 2.2%.

Market internals were decisively bearish. Volume climbed on the Nasdaq by 7.4% and on the NYSE by 12.9%. For the third time in as many days declining volume outpaced advancing volume. However, yesterday's action brought a major spike in down volume. By the closing bell the declining volume to advancing volume ratio stood at 16.6 to 1 on the Big Board and 15.5 to 1 on the Nasdaq. The spike in volume on both exchanges and the breadth of the selling points clearly to institutional distribution.

Via an intraday alert we entered a long position in the ProShares Ultrashort MSCI Brazil ETF (BZQ). Since April, this inverse ETF has attempted to break above resistance at $17.25 on three occasions. Further, during this timeframe the Accumulation/Distribution line has been in an uptrend as BZA has been consolidating. This bullish divergence suggests that institutions have been accumulating BZQ during this period of consolidation. This was an important signal that BZQ may be ready to set a new swing high and possibly reverse its downtrend. We are now on the fourth test of this resistance level and the odds now favor a move higher. Trade details are available for our subscribing members in the open positions section of the newsletter.



Whenever the market sees a significant selloff/rally it is useful to identify key support/resistance levels. Below are charts of the major indices that we follow along with a chart of the NYSE. Notice that all of the major indices are at key support levels with the Nasdaq showing some relative strength. The Nasdaq is just below its 200-day moving average while the other indices are prior swing lows. Notice that the NYSE has formed a head-and-shoulders-like pattern.













Over the past two weeks while others have been losing substantial sums, we are currently in positive trades and have protected capital by staying mostly in cash in this uncertain environment. In last Friday's newsletter we stated, "Since this week's reversal was swift and sharp, our research has not presented us with quality risk reward setups to enter short positions. Rather than chase the market we prefer to take the cautious approach and wait for the next opportunities to present themselves." Yesterday opportunity presented itself and we added to our position in SLV and opened a new trade in BZQ. Currently we are in the money on both trades.

The S&P 500 and the NYSE have now closed down each of the past 8 days. The Nasdaq has closed down or flat for the past seven days. All of the momentum indicators that we follow place the broad market squarely in an oversold status. The selloff could continue for several days but we will be looking to take profits at the first sign of a reversal.

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.