Failing to follow through on the previous afternoon's bullish reversal, stocks sold off across the board yesterday. However, slightly lighter volume eased the sting. The Nasdaq Composite ($COMPQ) lost 0.7%, the S&P 500 ($SPX) fell 0.8%, and the Dow Jones Industrial Average ($DJIA) slid 0.9%. The small-cap Russell 2000 ($RUT) and S&P MidCap 400 ($MID) declined 0.8% and 0.7% respectively. All the main stock market indexes closed near their intraday lows.

Turnover in both exchanges was modestly lower, enabling the broad market to dodge the label of a bearish "distribution day," which occurs when the major indices decline on higher volume. Total volume in the NYSE edged 1% lower, while turnover in the Nasdaq was 4% lighter than the previous day's level. In the NYSE, declining volume exceeded advancing volume by a margin of 3 to 1. The Nasdaq adv/dec volume ratio was negative by 5 to 2. Despite the significant percentage losses and negative market internals of the broad market, the lighter volume tells us that banks, mutual funds, hedge funds, and other institutions were not active participants in yesterday selling. Given that both the NYSE and Nasdaq registered a "distribution day" on August 21, we have been on the lookout for further instances of heavy volume selling. Since that didn't happen, we consider yetserday's selloff to be part of a healthy pullback off the highs.

Along with iShares Nasdaq Biotech ($IBB), which we are already long, the S&P Healthcare SPDR ($XLV) is one of the few industry sector ETFs showing relative strength to the main stock market indexes because it has been consolidating near its all-time high for the past four weeks. Starting with the daily chart interval, notice that $XLV has been clinging to support of its 20-day exponential moving average for the past week, even as the major indices have been pulling back off their highs over the past several days:



Zooming out to the longer-term weekly chart interval, notice that $XLV has been forming a pattern similar to a bull flag over the past three weeks. This type of price consolidation near the all-time highs should soon lead to a breakout that resumes the dominant uptrend. The weekly chart pattern is shown below:



Based on its relative strength, we are monitoring this ETF for potential buy entry in our model trading portfolio over the next few days. However, you will notice we did not yet list the trade as an "official" set up on our ETF trading watchlist. This is because we are waiting for a lower risk entry point, particularly one in which we can set a more clearly defined protective stop price. Aggressive traders may wish to take a shot at $XLV above the two-day high of $38.54, with a tight stop just below support of the 2-day low. However, given that we are not yet in a high momentum market, we prefer to first wait for some type of bullish reveral bar to form instead (as annotated on the daily chart above).

Although yesterday's losses in the broad market were substantial, the benchmark S&P 500 Index remains above near-term support of its 20-day exponential moving average. The Nasdaq Composite has been holding up even better, as the index remains above even shorter-term support of its 10-day moving average. Overall, we consider the markets current pullback to be a healthy retracement off the highs, and will maintain that bias unless we suddenly start seeing an influx of institutional distribution. When the major indices start attempting to head back up again, the next rally could lead to a breakout to fresh multi-year highs in several of the main stock market indexes.

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.