Equities dropped on Friday but on light trade. Small cap issues took the biggest hit, as the Russell 2000 lost a key support level at 811 and closed near session lows. The S&P MIdCap 400 shed 0.8% while the Nasdaq and S&P 500 dropped 0.4% and 0.3% respectively. The Dow Jones Industrial Average provided the day's best showing as it closed just fractionally lower. Airlines, gaming and paper products were Friday's best performing sectors, while coal, oil services, precious metals and transportation show relative weakness. On the week, the major indices closed mixed.

Market internals were mixed on Friday. Turnover fell by 7.8% on the Nasdaq and 13.5% on the NYSE. Declining volume held the upper hand over advancing volume by a ratio 1.9 to 1 on the NYSE and 1.6 to 1 on the Nasdaq. Friday's light volume placed a dampening effect on Friday's decline. Light volume suggests an absence of institutional participation in the day's action.

Given Friday's selling pressure, a review of the major indices is in order (see charts below). Recently, the Russell 2000 has demonstrated the most relative weakness. On Friday, the small-cap index lost key support at 811 and now appears headed for the 787 market, which corresponds with the 50-day moving average. If the Nasdaq is going to continue its uptrend, it should hold support at 787. In fact, a pullback into the 50-day MA should offer a buying opportunity in the small-cap Russell 2000.



The S&P MidCap 400 is currently toying with support at 972. If the mid-cap index loses this level, the next key support marks include 960, 945, and 928. Again, since we are still in an uptrend, each of these support levels could offer a buying opportunity.



The Dow Jones Industrial Average undercut its 10-day MA on Friday and if it loses support of this level (12,927), it will likely find it next resting place at the 12,880 mark (20-day EMA). A loss of support at the 20-day MA, would likely result in a move to the 12,735 to 12,740 area for the Dow.



The Nasdaq appears to be showing the most relative strength among all of the indices, as it is has yet to touch its 10-day MA over the past four sessions. However, a move below the 2,960 mark could result in a test of the 20-day EMA (2,910 area).



We exited our remaining open position in PPH on Friday. Overall, we don't like the price action in the market and decided to book a modest profit. We can always reenter the trade if the opportunity presents itself. Although the market has been weakening as of late, we are still in a confirmed uptrend. Light volume selling as we saw on Friday should not be a cause for concern. We focus solely on distribution days as a warning sign that a market rally is in jeopardy. Although price action has not been favorable lately, distribution days have been held in check.

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.