Stocks were set to post modest gains yesterday before a wave of late day selling resulted in a negative day on Wall Street. All five major indices closed lower as trade quickened. Monday's big winner, the small-cap Russell 2000, took the most punishment yesterday, as it closed lower by 0.7%. The S&P MidCap 400 slid 0.4%, while both the Dow Jones Industrial Average and S&P 500 fell 0.3%. The Nasdaq churned to close at the breakeven mark. Home construction, brewers and computer hardware showed the most resiliency yesterday, while oil services, precious metals and financial services fell more than 1.5%.

Market internals ended the day mixed. Turnover rose on the Nasdaq by 3.5% but closed 1.5% lower on the NYSE. Still, declining volume was higher across the board. Declining volume outpaced advancing volume by a factor of 2.5 to 1 on the NYSE and 1.3 to 1 on the Nasdaq. The NYSE narrowly escaped a distribution day due its lighter trade. Even though the Nasdaq closed at the breakeven mark, the higher volume suggests churning, a market condition where higher volume results in no movement in price during an established trend. Consequently, we consider Tuesday a distribution day on the Nasdaq.

Over the past three weeks, the iShares MSCI South Korea Index (EWY) has been setting a sequence of higher lows, as it has tested support near its 50-day MA on two occasions. EWY could provide a long entry on a move above the two day high of $60.20. An ideal setup for EWY would involve this ETF setting a higher low by undercutting its 20-day EMA and then reversing through the $60.20 mark (see purple arrows). We will be monitoring EWY closely for a possible long entry.

 

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.