Stocks were hit hard yesterday, with most major averages dropping 1.0% or more on higher volume. In hindsight, Wednesday's distribution confirms that there was churning (bearish stalling action at the highs) earlier in the week in the S&P 500 and NASDAQ Composite.

Wednesday's selling does put quite a bit of pressure on the current rally, but the uptrend remains intact in the S&P 500 and NASDAQ Composite. The small and mid-cap averages are relatively weak and in danger of losing the 50-day moving average, which is our line in the sand during a bull market.

What would it take for our timing model to produce a sell signal? A clear sell signal would be generated if most major averages and leading stocks were both under heavy distribution, and major averages were below the 50-day moving average.

We have one new setup on today's Wagner Daily watchlist, and it is a potential short setup in silver. Rather than shorting iShares Silver Trust ($SLV), we are looking to buy the inversely correlated ProShares UltraShort Silver ($ZSL) on a pullback.

The weekly chart below details the sharp rally off the lows at the beginning of 2013. $ZSL ran out of gas around $110 and pulled back into the 40-week MA. After two months of chopping around, $ZSL finally broke the downtrend line of the consolidation and rallied, stopping just shy of $100:



Currently $ZSL is in pullback mode, and we are looking for a potential long entry on weakness at or near support of the 10 and 40-week moving averages.

The daily chart shows the gap down below support at $86 this week. Notice how all three major averages (20, 50, 200) are now trending higher and in proper order. The 50-day MA has crossed back above the 200-day MA as well.

As mentioned above, we are looking for an entry on weakness. Trade details (for subscribers only) can be found in the watchlist section of today's report.



Here are a few more ETFs we are monitoring on the short side should market conditions continue to deteriorate: Emerging markets ETF ($EEM), Brazil ETF ($EWZ), and real estate ($SRS).

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.