Stocks recovered from significant early losses to finish the day mixed, and well off session lows. Four of the five major indices closed lower on the day but escaped distribution due to the intraday reversal. The Dow Jones Industrial Average was the strongest index on the day. The big cap index eked out a 0.1% gain. The S&P 500 and the S&P MidCap 400 fell 0.2% and 0.1% respectively. Both the small-cap Russell 2000 and the Nasdaq dropped 0.3% yesterday. Coal, healthcare, steel and telecommunications all performed well yesterday, while home construction, retail and financials showed relative weakness. Still, most sectors posted bullish reversal candles, thereby mitigating the impact of the negative price action.

Market internals ended the session mixed. Volume ended lower by 0.8% on the NYSE and 0.4% on the Nasdaq. However, declining volume held the upper hand on both exchanges. By the closing bell the spread ratio stood at minus 1.5 to 1 on the NYSE and minus 1.6 to 1 on the Nasdaq. Although both the NYSE and Nasdaq finished lower, volume was lighter and a distribution day was averted. Further, the late day price reversal combined with the late day spike in volume suggests that institutions were accumulating stocks into the close. Even if volume had been higher, we would have been hard pressed to categorize yesterday as a distribution day given the massive reversal.

Yesterday, IYR formed a second consecutive reversal candle and now appears ready to make a move higher. Notice how IYR undercut but reversed to hold support of the five day low. Also notice that this occurred on an uptick in volume. All of these factors bode well for IYR if it can find its way back above Wednesday's high of $61.89. IYR provides an excellent example of why we don't exit trades before they hit their stops. It's easy to "choke off" a trade when the pressure is on. Markets often turn on a dime and you must be able to sit through some pain in order to realize potentially bigger gains. Anyone not yet in IYR, could consider entering the trade above this key resistance level.



For the past three sessions, the iShares MSCI Japan Index Fund (EWJ) has been consolidating just below key resistance. Yesterday, EWJ formed a reversal candle and now offers a potential long entry above the three day high of $10.17.



Buyers stepped back into the market yesterday preventing what could have been a disaster for market bulls. Another distribution day would have put the market under considerable pressure. Based on yesterday's action into the close, we wouldn't be surprised to see the market put in a solid rally in the next few days.

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.