Stocks fell sharply on Monday but trade was mixed. Prices dropped across the board as all five major indices closed lower. However, stocks did recover from session lows. The small-cap Russell 2000 dropped 2.4% while the Dow Jones Industrial Average and the S&P MidCap 400 fell 2.1% and 2.0% respectively. Both the Nasdaq and the S&P 500 dropped 1.9%.

For the second time in as many days, market internals ended the session mixed. Turnover fell on the NYSE by 6.6% but climbed on the Nasdaq by 17.7%. However, declining volume held the upper hand on both exchanges. By the closing bell the ratio of declining volume to advancing volume stood at 14 to 1 on the NYSE and 3.8 to 1 on the Nasdaq. Based on the higher volume and higher declining volume we would classify yesterday as a distribution day on the Nasdaq.

Yesterday, on increasing volume, the S&P 500 ($SPX.X) lost support of and closed below its 50-day MA. The question now becomes whether or not this broad market index can reclaim this key mark and resist further decline. If the S&P cannot find support at the current level, it is quite possible that we could retest the most recent swing low near 1,100.



Despite the recent selloff in the market, the SPDR S&P Retail ETF (XRT) has been demonstrating relative strength. While the S&P 500 has lost support of its 50-day MA, XRT undercut, but held support at this key mark. If XRT continues to exhibit this kind of strength, when the market recovers, this should be one of the first ETFs to move to higher ground.



Distribution continued to mar the market landscape yesterday as the Nasdaq, but not the NYSE, fell under selling pressure. Our assessment remains bearish but we must now wait for setups to form in order to take short positions. In the meantime we strongly suggest patience in this challenging trading environment. Remember, cash is a position.

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.