Equities gave back most of Tuesday's gains amidst declining trade yesterday. All five major indices closed well in the red. The small-cap Russell 2000 led the decline as it posted a 5.1% loss on the session. The Dow Jones Industrial Average and the S&P 500 plunged 4.6% and 4.4% respectively. The Nasdaq shed just over 4.0% while the S&P MidCap 400 fell by 3.3%.

The session ended with market internals mixed. Turnover dropped across with board. On the Nasdaq trade slid by 10.7% while on the NYSE it fell by just over 10.0%. However, declining volume overpowered advancing volume as the spread ratio ended the session at 15.2 to 1 on the NYSE and 12.5 to 1 on the Nasdaq in favor of down volume. Wednesday brought the lightest volume in four sessions suggesting some indecision in the market and a lack of institutional commitment in yesterday's price action.

A followup to our recent analysis of the NYSE Composite Index ($NYA.X) should help to provide some clarity to whipsaw action of the past several sessions. Notice that although we undercut the predicted drop of the head and shoulders pattern, the NYSE found support at the 76.4% Fibonacci retracement level (Drawn from 06/30/2010 low to 05/02/2011 high). Also note that we have been caught in a wide trading range that is bound by the 61.8% Fibonacci retracement level and the 76.4% retracement level. A break through either of these levels should result in a fairly sharp move in the direction of the break.



Since the massive breakout move that began on August 2 and Culminated on August 8, the ProShares UltraShort Real Estate ETF (SRS) has pulled back sharply and undercut but held support of its 200-day MA. A few days of consolidation at the current level could bode well for a possible long entry in this ETF. We will be following this SRS closely for the formation of a potential long trigger.



We have been on the sidelines for quite some time now and that's where we need to be until the market settles in and provides us reasonable risk/reward setups. The current environment is more suited for day traders as most intraday rallies can be shorted. However, the current market conditions are not conducive to swing trading particularly given the breadth of the current three-day trading range. In this environment patience is warranted.

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.