Stocks closed mixed on Tuesday as trade rose slightly. The morning session showed promise as stocks rallied sharply. For most of the day stocks consolidated at the highs but at the 2:30 reversal period sellers entered the market and drove stocks to session lows into the close. Smaller cap stocks underperformed for the second consecutive day as the small-cap Russell 2000 and the S&P MidCap 400 dropped 1.7% and 1.3% respectively. After being up as much as 1.2% on the session, the Nasdaq closed down by almost 0.9%. The S&P 500 fell 0.2% while the Dow Jones Industrial Average closed fractionally higher.

Market internals were modestly bearish yesterday but when reviewed in context of the sharp intraday reversal a more negative picture appears. Volume climbed by 0.6% on the NYSE and 1.1% on the Nasdaq with most of the uptick in trade coming at the afternoon reversal period. Declining volume outpaced advancing volume by a ratio of 1.7 to 1 on the NYSE and 2.5 to 1 on the Nasdaq. Given the recent churn at the highs and yesterday's sharp intraday reversal we would classify yesterday as a distribution day for the broad market.

Yesterday the ProShares Ultrashort Basic Materials ETF (SMN) formed a reversal candle as it gapped down, sold off, abruptly reversed and rallied to close near the two day high. A volume assisted move back above yesterday's high of $21.24 could provide a long entry trigger for SMN. We are placing SMN on the watchlist. Trade details can be found in the watchlist segment of the newsletter.

Over the past two days the iShares Dow Jones US Real Estate ETF (IYR) has formed back to back reversal candles as it struggles to hold support of its 20-day EMA. A move below the two day low of $55.34 could result in further selling pressure for this ETF. We are also placing IYR on the watchlist. Trade details are available to our subscribers in the watchlist section of the newsletter.

We raised our stop in EEV yesterday and the stop was hit. We exited the second half of the trade and booked a solid gain. Our position in EUO remains intact and it appears ready to move higher. Yesterday's sharp reversal does not bode well for market bulls. If we see a follow through day on Wednesday, another round of heavy selling appears likely.

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.