Stocks sold off sharply throughout yesterday, with little to no rest, as evidenced by the 5-minute chart of the S&P 500 ETF ($SPY) below:



The selling was very persistent, as the price action was unable to cross above the 20-period EMA on a 5-minute chart until the close.

Turnover confirmed the move in price, as volume jumped higher on both exchanges, printing another distribution day in the S&P 500 and Nasdaq Composite. That makes three distribution days in five sessions for the Nasdaq. When distribution days begin to cluster it is always a warning sign that a significant correction may be just around the corner:



Yesterday's plunge produced a ton of bearish engulfing candlesticks on the daily charts of sector ETFs and broad market averages. The Nasdaq is sitting just above a support level from a prior swing low and the highs of the last base. Given that the last base was V-shaped, odds are that this support area may not hold, which would send the action down to the 50-day MA, around $4,200.

The S&P 500 has also pulled back to its first support level, but a touch of the 50-day MA now seems likely:



In yesterday's report, we mentioned the bullish basing action and recent breakout in Dow Jones Transportation ETF ($IYT). However, Thursday's price and volume action was quite the ugly response to a move to new highs. $IYT may need to chop around for a few weeks above the 50-day MA to produce a low risk entry point:



Financial ETF ($XLF) may need several weeks of base building to digest the recent false breakout action. We have never been a fan of breakouts from V-shaped rallies, as they are not very reliable:

 

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.