Good Morning, Traders. Ugly selloff on Friday which started off bullish and turned sour very quickly, closing the market on its lows. Lets look under the hood together of what happened internally as the Dow lost 96.46, the S&P shed 13.54, and the Nasdaq Composite squandered 22.15. Firstly, selling was across the board. It was a broad based decline as the entire ShadowTrader Core Sector List was negative. Gold, Semis, and Natural Gas appreared to take it on the head the most with all of those sectors off more than 1.5% from the open. As long time readers of this column know market breadth as measured by a ratio of advancing to declining volume is the absolute best measure of a markets health. Accordingly, Friday was rather sickly indeed. Breadth on the NYSE closed at almost 6:1 negative and on the Nasdaq not much better with the ratio being over 3 to 1 in the same direction. Decliners beat advancers on the Nasdaq by 1136 and by 2034 on the NYSE, which brings us to the chart above. Don't ever discount or lose track of what is happening internally in the markets. Notice how this NYSE reading in the advance decline is the lowest in a full year? That is of note. Whenever there is a disconnect between the direction that the cash markets are heading (sideways to up) and what is happening internally, its a red flag of sorts and should be noted. This concept of negative divergence is very important. The question is, will this negative internal reading act as a leading indicator of lower prices in the near term. Well, the last time the advance decline line in the NYSE ticked this low was in May of 2004. Soon after, the S&P rallied feebly to a double top area of 1135 and them promptly sold off to lower lows of August 2004 which became the starting point of the current upswing. So, either way, whether Friday precludes a needed correction that will wash out the last of the strong sellers in order to push the S&P higher or the start of another bear market (doubtful, but possible) remains to be seen. Odds do however favor that over the next few months prices may back off one way or the other. In the context of truly sustainable rallies, there really should not be correction days that set new records for negative internals. So, once again, we reiterate as always: This is a stock pickers market. Be highly selective. Consider using options as hedges against long positions, especially those that you have a profit in that you would like to keep. The outlook remains cautiously bullish overall and sideways to down in the near-term. Be careful out there. If the mood seriously changes and we start to break trend you'll of course hear it here first. Stay tuned.

Peter Reznicek is the Chief Equity Strategist and a principal of the Prana Fund, a domestic hedge fund, and ShadowTrader, a subsidiary of thinkorswim which provides coaching and education to its clients on both intraday and swing trading of equities. For a free trial to the full version of The Big Picture or to learn about ShadowTrader's other services, visit shadowtrader.net or send an email to preznicek@shadowtrader.net.