Following an opening gap up, stocks went tumbling yesterday as trade expanded. For a second day in a row, the market gapped higher at the open. However, selling pressure came into the market at the morning reversal period in contrast to the late session selling we saw on Tuesday. All five major indices closed down and near session lows. Higher beta issues led the decline. The S&P MidCap 400 plunged 0.9% while both the small-cap Russell 2000 and the Nasdaq slid 0.7%. The S&P 500 closed down by 0.4%. The Dow Jones Industrial Average put in the best performance on the day, as it contained losses to a modest 0.3%.

Market internals were bearish for a second consecutive day. Volume increased on the Nasdaq by 7.2% and ont he NYSE by a modest 0.4%. Declining volume topped advancing volume by a ratio of 2.5 to 1 on the NYSE and 2.1 to 1 on the Nasdaq. As a result of Wednesday's bearish internals, we would categorize the day as a distribution day on both exchanges.

In the May 9th and 14th editions of The Wagner Daily, the swing trading newsletter with our best daily stock picks, we discussed the head and shoulders pattern that was forming on the small-cap Russell 2000. In the May 9th issue we stated, "if the Russell 2000 loses support of the neckline at 785, then the predicted selloff would be to 720. We will be monitoring the Russell carefully, as its next test of the 785 mark could result in the loss of support and a significant move lower." Then, on May 14th, we commented that, "(a move by IWM) below Friday's low of $78.42 could result in a break of the neckline of the head and shoulders pattern. A drop below this key level would likely result in a quick move to the 200-day MA for IWM."

Yesterday, IWM did in fact breach its neckline and now appears headed for the 200-day MA. In all likelihood, IWM will initially find support at its 200-day MA. Typically, when a neckline of a head and shoulders pattern is broken, a subsequent bounce will occur back up into resistance near the neckline. This bounce generally results in another short selling opportunity:



Although it saw a shaky start, our open position in $SOXS rallied strongly yesterday, and we are now up over 6% in this trade. $TZA hit its trigger for entry yesterday, as did our short entry into $BRCM. Both of these positions are showing unrealized gains due to yesterday's weakness, but we will continue to monitor closely and adjust stops accordingly.

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.