Stocks closed down sharply for a second consecutive day on higher trade. All five exchanges closed lower with the Nasdaq showing the most weakness. By the closing bell, the tech-rich index had shed 2.0%. The S&P MidCap 400 followed closely as it dropped 1.9%. The S&P 500 slid 1.7% while the small-cap Russell 2000 fell 1.5%. The Dow Jones Industrial Average showed the most resiliency on the day as it contained losses to 1.1%.

For a second consecutive day market internals came up bearish. Volume climbed by 13.5% on the Nasdaq and 8.8% on the Big Board. Declining volume once again overpowered advancing volume across the board. The ratio of declining to advancing volume ended the day at 11.4 to 1 on the NYSE and 4.3 to 1 on the Nasdaq. Thursday's market internals point to a second consecutive day of institutional distribution. Further, yesterday was also a bearish follow-through day, and the sixth distribution day on the S&P 500 in the last twenty days. The Nasdaq has seen four distribution days in the same timeframe. Given the recent buildup in distribution days and the lack of bullish follow through in recent breakouts our market timing model has shifted to a sell signal.

We are removing XRT from the watchlist because the setup is no longer valid given the recent selling pressure in the market. However, XRT is still showing relative strength amidst the market weakness and as long as it holds support at the 50-day MA, it still provides an opportunity on the long side. XRT must now stabilize and consolidate in order to establish a new setup for a long entry. We will continue to monitor this ETF closely.



In a recent newsletter we stated that GLD could offer a possible long entry on a pullback into its 20 and 50-day moving averages. Yesterday, on a major spike in volume, GLD sold off sharply and is now clinging to support of the 50-day MA. GLD must hold support here or it will likely drop quickly and test the 200-day MA. If GLD is able to hold support at the 50-day MA, it will likely take a week or two for a potential long entry to develop. It appears less likely that GLD will be able to hold support at the current levels given yesterday's sharp sell-off.



Despite the fact that the market is clearly beginning to struggle it is important to keep in mind that the type of price action we are seeing is not at all unusual for first thrust reversals. This market is capable of turning on a dime as has been evident lately. There's no question that our bullish bias is under duress; however, it would be imprudent to jump to the bear camp without further confirmation.

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.