Stocks closed lower on Wednesday and for a second consecutive day slid sharply into the close. In a reversal of Tuesday's price action, smaller cap issues showed relative weakness on Wednesday as the small-cap Russell 2000 and the S&P MidCap 400 sank 4.1% and 3.8% respectively. The tech-rich Nasdaq dropped 2.2% as the S&P 500 lost just over 2.0%. The Dow Jones Industrial Average showed the most resiliency on the day as it contained losses to just over 1.6%.

Internals were mixed on Wednesday. Volume fell across both exchanges. Turnover slid by 8.1% on the Nasdaq and 10.7% on the Big Board. However, declining volume easily outpaced advancing volume by 7.4 to 1 on the Nasdaq and 26.3 to 1 on the NYSE. Despite the lighter volume yesterday's late day price action gave all the appearances of institutional distribution. At a minimum it was a follow-through day for market bears.

Yesterday, via intraday alert we re-entered a position in the ProShares UltraShort Real Estate ETF (SRS) as it moved above Tuesday's reversal candle. Although we had just taken a loss in SRS on Tuesday we did not hesitate to re-enter the trade when a quality setup presented itself. Each trade stands of its own merits. We also sent an alert that we were shorting the S&P Consumer Staples Select Sector SPDR ETF (XLP) as it broke the two day low. EFZ also triggered yesterday and we entered the position. Trade details for these positions are available to our subscribers in the open positions section of the newsletter.





Last week we discussed two key support levels on the S&P 500. There are two distinct swing lows in place that the S&P must hold or the market is likely to see another significant selloff. The first key level is 1,120 which was established last week. If we lose support at 1,120 then the next stop is likely the August 9 swing low of 1,100. If we breach the August low we could test the lows set in July-August of 2010. At a minimum, now that the market is within striking distance of the August 9 swing low, it appears likely that we will move to at least undercut this key mark.

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.