Stocks gave back most of Tuesday's gains on mixed volume yesterday. Higher beta issues took the brunt of the selling as both the Nasdaq and the small-cap Russell 2000 fell just over 2.0%. The S&P MidCap 400 fell 1.6% while the S&P 500 shed 1.3%. The Dow Jones Industrial Average showed the most strength on the day as it closed lower by a modest 0.6%.

Market internals ended the session mixed. Volume rose on the Nasdaq by 2.5% but fell on the NYSE by almost 12.0%. However ,declining volume topped advancing volume on both exchanges. On the NYSE the spread ratio ended the day at a minus 5.2 to 1 and on the Nasdaq at a minus 3.1 to 1. Because of the higher volume the Nasdaq posted both a bearish reversal and distribution day. There was clearly a divergence between the Nasdaq and the NYSE yesterday.

The S&P Select Technology SPDR ETF (XLK) gapped down and formed a reversal candle yesterday on a significant spike in volume. The fact that this burst of selling came on the heels of an accumulation day in the market does not bode well for XLK. A move below the two-day low of $25.27 could provide a shorting opportunity in this ETF.



Yesterday, on a big spike in volume, the ProShares UltraShort Dow Jones AIG Crude ETF (SCO) formed a reversal candle as it undercut the 200-day MA and rallied to close near session highs. A volume-fueled move back above the two-day high of $53.95 could provide a buy entry trigger for this inverse ETF.



The market provided mixed signals yesterday as the Nasdaq diverged from the DJIA and the S&P 500. Given this divergence it is quite possible that we could see a pullback in the Nasdaq but sideways/rally action elsewhere. Caution is warranted in this choppy environment.

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.