In yesterday morning's commentary, we warned the NASDAQ was imminently headed for a significant correction and that it was time to exit long positions and/or trail very tight stops.

Our warning signals turned out to be rather timely, as the NASDAQ plummeted 1.9% on heavy volume and sliced through support of its 20-day exponential moving average thereafter.

On the weekly chart below, notice that yesterday's selloff caused the NASDAQ to slide back below the upper channel trendline we recently discussed, and the index is likely headed down to its 10-week moving average (roughly the same as 50-day moving average) within the next few days:



For many investors, the Dow Jones breakout to new highs on Wednesday (two days ago) was a bullish sign. If so, then Thursday's selloff was an extremely ugly reaction to new highs, as the Dow printed a bearish engulfing candlestick on higher volume:



Yesterday, we also said that leading stocks were lagging (and breaking down ahead of) the major averages, which was a warning sign we could not ignore.

As such, we tightened stops on existing ETF and stock positions, which allowed us to lock in gains and minimize losses on new entries.

We are now sitting in a 100% cash position on the stock side, with only one open ETF position ($PPA), which has a very tight stop to protect gains.

The next big question is when do we go short? It is a bit too late to grab any short exposure right now, but a short-term bounce in the market could produce some decent entry points.

On the ETF side, we are presently stalking a real estate ETF ($IYR) for potential short entry and/or buying the inversely correlated real estate ETF ($SRS).

Other short setups will likely develop as well, and we will be sure to alert newsletter subscribers of trade details for any new setups.

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.