Stocks took a beating on Friday but on lighter pre-holiday trade. All five indices closed in the red as stocks struggled from the opening bell. Both the small-cap Russell 2000 and the S&P MidCap 400 plunged a whopping 3.6%. The Nasdaq slid 2.6% while the S&P 500 fared fractionally better as it posted a 2.5% loss. The Dow Jones Industrial average fell by 2.2%.

In a followup to Thursday's action, market internals ended mixed. Volume dropped by 9.7% on the Nasdaq and 6.3% on the NYSE. However, the ratio of declining volume to advancing volume provided a bearish signal as it ended the day at 21.8 to 1 on the Big Board and 13.1 to 1 on the Nasdaq. Although the market was spared a distribution day as a result of the mixed internals, the bearish price action has placed an already weak market under even more pressure.

In Friday's newsletter we discussed the iShares MSCI Mexico Investable Market Index ETF (EWW) and stated that it was a possible short setup below the September 1 low. On Friday EWW gapped below this low and found support at the 20-day EMA. A volume assisted move below the 20-day EMA could provide a shorting opportunity in this ETF.



On Friday the iShares MSCI South Korea Index ETF (EWY) lost support of its 20-day EMA but found support at the gap formed on August 29. A move below Friday's low of $54.47 should result in further downside for this ETF.



As of this writing stocks in Europe have gotten blasted as markets in Asia are also getting hit hard. For the moment it appears as if the US markets will open considerably lower. Consequently most if not all potential setups will be nullified. If the market does gap down at the open we will likely be looking to cover our open positions into this move.

Friday's market action gave all the signs of a distribution day despite the lighter volume. However, the lower trade could be expected coming into summer's last hoorah. It was most certainly a follow-through day for the broad market. Nonetheless, lighter volume across the board for two consecutive days suggests that buyers could step in at any time. For the current selloff to gain more credibility, we would want to see a follow-through day on increasing volume. Be prepared for major volatility this week.

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.