After getting off to an encouraging start in the first two hours of trade, stocks reversed course and settled into a steady intraday downtrend that persisted into the close. All the main stock market indexes closed substantially lower, with the blue-chips holding up the best. The Dow Jones Industrial Average ($DJIA) lost 0.8%, the S&P 500 ($SPX) fell 1.1%, and the Nasdaq Composite ($COMPQ) shed 1.4%. Small and mid-cap stocks, which have recently been showing the most relative strength, registered the largest losses. The small-cap Russell 2000 Index ($RUT) declined 1.5%, as the S&P MidCap 400 ($MID) similarly posted a 1.6% decline. All the major indices closed at their dead lows of the day, indicating the bears firmly had control into the close.

Turnover ticked higher across the board, causing both the S&P 500 and Nasdaq to register a bearish "distribution day." Total volume in the NYSE increased 22% above the previous day's level, while volume in the Nasdaq swelled 15%. This time, market internals were pretty week as well. In the NYSE, declining volume trounced advancing volume by a ratio of more than 8 to 1. The Nasdaq ADV/DEC volume ratio was negative by a margin of approximately 4 to 1. While yesterday's session was convincingly indicative of selling among banks, mutual funds, hedge funds, and other institutions, it was the first such "distribution day" we have seen in recent weeks. Although higher volume selling is typically a bearish indicator, it is normal for the broad market to experience one or two days of distribution within the course of a healthy rally. Nevertheless, we will be on guard for further instances of institutional selling. As a general rule of thumb, it takes at least four or more "distribution days" within a 3 to 4 week period to destroy an uptrend.

Not surprisingly, most of our open ETF positions registered losses yesterday. However, one exception was US Natural Gas Fund ($UNG), which bucked the trend by zooming 2.2% higher amidst the broad market losses. Two days ago, in the September 24 issue of The Wagner Daily, we pointed out the potential bullish trend reversal that was setting up in UNG. Yesterday, our analysis follow-through as anticipated, as UNG convincingly broke out above long-term resistance of its 200-day moving average. In the process, it triggered our buy entry in the model ETF trading portfolio, and the trade is now showing a small unrealized gain. The breakout above the 200-day MA is shown on the daily chart pattern of UNG below:



Although it's positive that UNG closed well above key resistance of its 200-day MA, it also did the same thing on September 12. Two days later, however, the breakout attempt failed and the ETF fell back below that resistance level. But this time, we believe there are greater odds that the trade will follow through to the upside because the length of time between the previous breakout attempt and the current breakout attempt was very short. Additionally, as previously pointed out, the ETF has also formed several "higher lows" since bottoming in April of this year. The only thing we did not really like about yesterday's price action is that volume failed to jump above its 50-day average level, but we will see how if it picks up in today's session.

Although most traditional long-term investors would not be pleased by yesterdays selloff in the broad market, we view the pullback as positive because the main stock market indexes were due for a correction. Whenever stocks start trading too far above their 20-day moving averages for too long of a period of time, the reward to risk ratio of new trade entries becomes diminished. However, once the inevitable pullback finally comes, it creates new, lower risk opportunities for new trade entry within the existing uptrend.

Given yesterday's broad-based decline, now is a good time to take an updated look at the daily chart patterns at ETFs of the most popular stock market indexes, in order to see where the next support or resistance levels may be found. Let's start with a look at the S&P 500 SPDR ($SPY), a popular ETF proxy for the benchmark S&P 500 Index. This is followed by daily charts of the Nasdaq 100 ETF ($QQQ) and Dow Jones DIAMONDS ($DIA):







On the surface, yesterday's selloff may have seemed severe. However, in context with the strength of the recent rally, notice on the charts above that not a lot of technical damage has been done. SPY closed just below near-term support of its 20-day exponential moving average (the beige line), while DIA is still holding above it. QQQ looks a bit worse because it is closed below both its 20-day exponential moving average and horizontal price support of its prior highs. However, the index was also showing relative strength on the way up.

For now, it's too early to tell whether or not bearish momentum will build on yesterday's decline. Given that it was the first "distribution day" in recent weeks, there is not yet any indication of significant danger in the near-term. Even if stocks continue lower over the next several days, much more significant support of the 50-day moving averages (the teal lines) should halt the decline.

More so than actual price action, will be closely monitoring subsequent volume patterns for any further instances of institutional selling (higher volume losses). Until that happens, our rule-based market timing model mandates that we view the current pullback as a buying opportunity, rather than the time to exit long positions and go to cash or sell short. Nevertheless, we are not interested in taking on additional long exposure until the market confirms yesterday's selling will be short-lived and subsequently lead to a resumption of the dominant uptrend of the past several months. Remember that we are not in the business of making stock market predictions; rather, we merely react and take action in tangent with what the market gives us. As always, our newsletter subscribers will be immediately notified if there are any changes to our current market timing mode.

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.