Stocks were pummeled on Wednesday on a significant spike in volume. All of the major indices sank more than 3.0%. High beta issues led the carnage as the small-cap Russell 2000 and the S&P MidCap 400 plunged 4.8% and 4.3% respectively. The Nasdaq shed 3.9% while the S&P 500 and the Dow Jones Industrial Average dropped 3.7% and 3.2% respectively. All stocks on the DJIA closed down on the session. The selling was dramatic and broad based.

Market internals were decisively bearish yesterday. Volume skyrocketed on the Nasdaq by 16.0% and on the NYSE by almost 24.0%. In addition, declining volume overwhelmed advancing volume by a ratio of 66 to 1 on the NYSE and 18.7 to 1 on the Nasdaq. Institutions were clearly led the day's selling activity. Yesterday was an obvious distribution day for the broad market. Given the magnitude of yesterday's selloff, we are changing our market bias from bullish to neutral.

XRT traded within pennies of its stop of 51.27 and, given the market action yesterday, we may look to lighten up on the position should we see a bounce. PPH is still trading well above its stop of 66.63 but if the market sees further selling pressure PPH could also hit its stop. We will be watching the price action carefully at the open on Thursday and make our decisions with respect to each of these trades then.

We've stated over the past several days that we must avoid further distribution days and that we need to hold the November 1 swing lows established on the major indices. If we lose these swing lows then the current rally could easily reverse. A new swing low following the lower highs just set, could signal a trend reversal. A brief review of the major indices below demonstrates this clearly.








In a recent Newsletter we stated that the iShares MSCI Japan Index ETF (EWJ) was in danger of losing a key support level ($9.17). A move below this level could provide a shorting opportunity in this ETF.



Although we rarely reference news, the situation in Europe is systemic and there is little doubt that institutions reacted decisively to the information. Wednesday marked the fourth distribution day since the bullish confirmation day occurred on October 18. If we get a fifth distribution day in the next few days, then that would likely put the current rally in jeopardy. However, it is important to not overreact and instead allow the market to sort the details out. The biggest moves higher generally occur in the midst of very negative news.

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.