Last Friday's significant gap down on the open put immediate pressure on those who established new long positions based on last Thursday's positive close. Despite the weak open, stocks rallied higher most of the day before giving way to selling pressure in the final two hours of trading. The late selloff was disappointing for the bulls, as the market failed to produce an accumulation day in three attempts last week. As such, the volume pattern remains bearish on the NYSE and Nasdaq.

The end of January saw a big jump in market volatility, with three significant gaps on the open last week alone. When volatility increases, it becomes difficult to manage risk. When the market is in trend mode, traders can get away with late entries due to the strength and reliability of an uptrend. However, when distribution hits the market and volatility picks up, late entries can be punished in a hurry.

Aside from Natural Gas and Gold, we are not looking at new longs right now, as we are content to manage open positions while waiting for market conditions to settle down.

The Nasdaq Composite managed to close off the lows of the week, but just below the 10-week MA (in light blue) on the weekly chart below. If the Nasdaq breaks last week's low this week, then a test of the $4,00 level is likely in short order. However, if last week's low holds, then the market may take a few more weeks to hit this level. Either way, it looks as though the Nasdaq will eventually hit 4,000 within the next several weeks (this is not a prediction, as ANYTHING can happen).



Facebook's ($FB) positive reaction to earnings gave a much needed lift to our long position in the Global X Social Media ETF ($SOCL). $SOCL closed with a bullish reversal candle on higher volume. Last week's low should hold up in the short-term, but the action will need several weeks of consolidation in a fairly tight range to work off the recent volatility:



Our current long position in Shipping ETF ($SEA) sold off, but closed above the 10-week MA on very heavy volume. Most of the week's volume was on one day (1/29), which was a tight ranged session that gapped lower on the open. If last week's heavy volume was truly distribution, then the price action will slice through the 10-week MA within in the next week or two. If the volume as support, then last week's low should hold up with a little wiggle room;



Overall, leadership stocks have held up better than expected, which has prevented us from shifting the timing model to a sell signal.

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.