Stocks were obliterated on Thursday on a massive spike in trade. Stocks opened at the high and closed at the dead lows of the day. Over 2000 stocks closed down more than 4.0%. All five major indices closed down more than 4.25% and not a single industry group was spared from the carnage. Small cap stocks took the brunt of the beating as the small-cap Russell 2000 and the S&P MidCap 400 plunged 6.0% and 5.9% respectively. The Nasdaq was pelted 5.1%. The S&P 500 dropped 4.8% while the Dow Jones Industrial Average tumbled 4.3%. Needless to say it was a brutal day for Wall Street.

Market internals were overwhelmingly negative. Volume rose by 26% on the Nasdaq and 31.5% on the NYSE. What was even more stunning was the ratio of declining volume to advancing volume. By the closing bell the spread ratio stood at a lofty 84 to 1 on the NYSE and 71 to 1 on the Nasdaq in favor of declining volume. Market internals do not get much worse. Institutions were clearly bailing out of the market on Thursday.

It now appears that the NYSE will fulfill the predicted drop of the head and shoulders pattern that we have discussed several times over the past ten days. Below is both a daily and weekly chart of the NYSE. Yesterday, this index definitively lost support of the Neckline of its recently formed head and shoulders pattern. The NYSE is now within approximately 350 points of its predicted drop. However, a review of the weekly chart suggests that the NYSE could find support at the current level since it is coming into support of the 200-day MA on the weekly chart.





We are glad to be flat the market and to have booked some winners this week. On Thursday we took profits in BZQ and yesterday in SLV. Combined, these trades netted a gain of nearly 2% for the model portfolio.Thursday's tumble was the worst since the banking crisis in 2008. Given the capitulation that we saw in the market yesterday we fully expect a sharp reversal in the next few days but further downside is still possible because volume continues to expand. It would be unwise to consider taking any short positions this late in a market correction. Our plan is identify potential shorting opportunities into a bounce.

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.