Stocks rebounded on Thursday but trade was light. All five of the major indices ended the session in positive territory, led by the Dow Jones Industrial Average. The blue chip index posted a solid 1.0% gain. Both the S&P 500 and the small-cap Russell 2000 posted 0.9% gains. The S&P MidCap 400 tacked on 0.5% while the Nasdaq eked out a 0.1% gain.

Internals ended the day mixed. Volume dropped on the Nasdaq by 11.5% and on the NYSE by 17.5%. However, advancing volume finished slightly higher than declining volume by a factor of 2.5 to 1 on the NYSE and 1.6 to 1 on the Nasdaq. Although the market bounced back yesterday, the lackluster market internals and lack of breadth in the rally suggest that institutional players were on the sidelines. Friday should provide a better gauge as to the market's true reaction to Wednesday's distribution.

Although we exited our positions in XRT and PPH yesterday, both ETFs are still potential long candidates. In volatile markets it sometimes makes sense to take a trade off the table and re-enter if and when another setup presents itself. XRT could provide a partial position entry above the two-day high ($52.50). On Wednesday, XRT pulled back on lighter volume and undercut the 20-day EMA. Yesterday it formed a reversal candle on higher volume, suggesting it was being accumulated. We may consider building a position in this ETF by taking small size above the two-day high. However, we prefer to make the call intraday due to the recent volatility in the market. Ideally, XRT needs to consolidate for a week or two more in order to build a sufficient base from which to launch a potential rally. PPH also performed well on Thursday but requires more sideways action in order for a quality setup to develop. What we would like to see in PPH is the formation of a higher low followed by additional consolidation prior to a possible move higher.





On the opening gap up we exited our open positions in XRT and PPH. XRT yielded a two percent loss while the PPH trade ended up being a scratch. We made the judgment call to exit the trades because we felt it was important to protect capital in light of Wednesday's broad-based distribution. All of the major indices managed to hold support at or near their respective 20-day EMAs in the aftermath of Wednesday's carnage. Further, leadership stocks held up surprisingly well over the past two sessions, suggesting the market may not be ready to roll over just yet.

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.