Wednesday was an ugly day for the bulls, as stocks tracked lower all session long with little to no rest. The selling was steady, with all major averages closing near the lows of the day, down -0.8% to -1.1%. A pick up in volume on the NASDAQ produced a second straight day of distribution. Whenever distribution days begin to cluster it is usually not a good sign for the market. Volume was lighter on the NYSE.

The piling up of distribution days the past two weeks now forces our market timing model into "neutral." Although there is not enough distribution on board in the market to shift to "sell" mode, leading stocks are still holding up for the most part, preventing an outright sell signal:



We haven't been very active over the past two weeks due to the bearish price and volume action in the market. For those who are new to our letter, our main focus is to trade with the trend of the market, so when the trend is in danger of reversing, we prefer to cut back on the number of trades and sit mostly in cash. Patience is key now, as we wait for new setups to develop (long or short).

We have a few ETFs we are monitoring on the short side, just in case market conditions continue to deteriorate. One such ETF is the iShares MSCI Brazil Capped Index ($EWZ). The monthly chart below shows the recent breakdown below support around $50. While we are not looking to establish short positions right now, $EWZ could develop in to a short setup if it breaks down and then bounces back into support at or near $50 (which is now resistance) on light volume. $EWZ hasn't rallied with the market since the beginning of 2012, and is already breaking down ahead of the market, so it could become a leader to the downside:



Most breakout attempts have failed the past two weeks, and that is to be expected when the market runs into multiple distribution days and the volume patterns turn bearish. As mentioned in yesterday's newsletter, now is not the time to step on the gas with regard to long exposure.

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.