Again breaking the tradition of low volatility ahead of major U.S. holidays, Wednesday's roller coaster session kept the bulls and bears on their toes. Stocks got off to a weak start by gapping down and trending lower throughout the first ninety minutes, reversed into positive territory in the early afternoon, then tanked in the final hour. Though the intraday price action see-sawed like the previous day, the closing prices bore no resemblance. All the major indices closed sharply lower and at fresh near-term lows. Both the S&P 500 and Dow Jones Industrial Average fell 1.6%, while the Nasdaq Composite shed 1.3%. The small-cap Russell 2000 and S&P Midcap 400 were lower by 1.2% and 1.3% respectively. Showing relative weakness, both the S&P and Dow settled at their intraday lows, but the Nasdaq only retraced half of its earlier loss into the close.

Turnover eased as traders began heading out of their offices for the Thanksgiving Day holiday. Total volume in the NYSE receded 17%. The Nasdaq volume was 20% lower than the previous day's level. Not surprisingly, market internals were firmly negative. Declining volume in the NYSE exceeded advancing volume by a margin of 5 to 1. The Nasdaq ratio was negative by 3 to 1.

Although the Russell 2000 lost 1.2% on Wednesday, it's technically significant that it held the prior day's intraday low. This means the index is still holding above its prior low from August. It would be a stretch to declare this as bullish, but the chances for a significant bounce off the prior low remain intact. It's not a good sign that the Nasdaq closed below its 200-day MA in the last session, but it did manage to close above the prior day's low as well. The Dow Jones Industrial Average gave the worst signal when it closed below its August closing low on Wednesday. Nevertheless, it held above the intraday low of August.

When the major indices began retracing two-thirds of the gains from their August lows to October highs, we said that odds were high of the August lows being tested. Both the Russell 2000 and Dow Industrials are already doing so, while the S&P 500 is only ten points (0.7%) away from its August closing low. The big question on everyone's mind is whether or not the August lows will hold next week. If they do, we could see a decent retracement through at least the short-term. But if not, a break of the August lows would technically change the broad-based downtrends from intermediate-term to long-term.

Presently, the S&P 500 is approximately 10% off its 52-week high. More than 8% of that loss has occurred this month alone. When the major indices fall 10% from their highs, that is generally defined as a confirmed intermediate-term correction. Obviously, nobody knows how long the current downtrend will last, or how ugly the scenario will get before it gets better. Therefore, you may want to devote some time over the long weekend to figuring out your gameplan in the event the market enters into a protracted downtrend, as it did from the years 2000 to 2002. Hopefully that won't happen, but consistently profitable traders and investors must be mentally prepared for all possible scenarios. The market will eventually recover, but capital preservation must be your top priority right now so that you can put your cash to work when the buying opportunities begin presenting themselves again.

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and Morpheus Trading Group, a trader education firm launched in 2001 that provides daily technical analysis of the leading ETFs and stocks. For a free trial to the full version of The Wagner Daily or to learn about Wagner's other services, visit MorpheusTrading.com or send an e-mail to deron@morpheustrading.com.