Just a day after attempting to stabilize from Tuesday's sell-off, the stock market basically pulled a repeat of that day's session. The broad market gapped down on the open, then trended steadily lower throughout the day. A modest bounce in the final hour of trading enabled stocks to finish off their worst levels of the session, but all of the major indices except the Nasdaq still closed with losses greater than two percent. Both the S&P 500 and Dow Jones Industrial Average plunged 2.3%, the S&P Midcap 400 slid 2.2%, and the Nasdaq Composite fell 1.8%. Small-cap stocks continued their rapid descent, as the Russell 2000 Index tanked 2.6%. Heavy sector rotation out of aggressive growth stocks has caused the Russell 2000 to plummet more than 7% over the last five days. The index also closed below its 200-day moving average for the first time since early October of 2006.

Although most financial media outlets failed to discuss it in yesterday's closing market commentary, the unequivocally worst thing about the session was the colossal surge in turnover. Total volume in the NYSE catapulted 37% above the previous day's level, while volume in the Nasdaq similarly rose by 35%. If not for the trading curbs that were implemented in an effort to control yesterday's decline, turnover would have been even higher. Still, according to our records, the 2.7 billion shares that exchanged hands at the NYSE was already the second heaviest day of volume in history. It was surpassed only by the 2.8 billion shares that traded on July 24, 2002. When we talk about institutional distribution, there couldn't be any better example! The rush to the exit doors also resulted in atrocious market internals. Declining volume in the NYSE thrashed advancing volume by a margin of 15 to 1. For every 10 issues that declined, only 1 went up. The Nasdaq adv/dec volume ratio fared slightly better at negative 7 to 1.

Over the past several days, we have said that our intermediate-term bias would remain neutral unless the S&P 500 broke below its June low. This happened yesterday. As you can see on the daily chart below, the benchmark index recovered a bit off its intraday low, but still closed below its June low:



Since a significant "lower low" has been set on the daily chart of the S&P 500, our intermediate-term bias on the broad market has shifted to bearish. However, our short-term bias has shifted to neutral because the S&P has corrected nearly 5% off its all-time high in just one week. Over the next few sessions, the index could easily stage a relief rally attempt, but we would be quite surprised if it makes it back above resistance of its 50-day MA (at 1,521). Below, the 200-day moving average should act as the next major level of price support (at 1,447).

On Wednesday, we took advantage of the S&P 500's opening gap up into resistance of its 50-day MA by buying the inversely correlated UltraShort S&P 500 ProShares Fund (SDS). Our original price target at the time of entry was $55.80, just below resistance of its 200-day MA (or support of the 200-day MA for the S&P 500). Though we felt odds were good of SDS reaching its target, we did not expect it to nearly do so just one day later. Yesterday's high in SDS was $55.68, just 12 cents shy of our actual target. But because SDS made such a large move in a very short time, we made a judgment call to take profits on the trade, near its intraday high, rather than possibly sitting through a pullback just to make a few cents more. We sold SDS at an average price of $55.16, netting a gain of 3.47 points for a one-day hold.

Not surprisingly, the broad-based weakness spread to our remaining two long positions. We sold the CurrencyShares Canadian Dollar Trust (FXC) on the open, when it gapped down below support of its daily uptrend line. Fortunately, our entry price was low enough that the trade was just a scratch. Our long position in the PowerShares Clean Energy Fund (PBW) stopped out for a loss of 1 point. However, we are watching it for a potential re-entry in the coming days because most of the solar energy stocks continued to show good relative strength in the face of heavy selling. If a sector barely drops when the broad market falls sharply, that sector is usually the first one to zoom higher when the overall market eventually finds support.

Given the nearly record turnover that accompanied yesterday's aggressive selling, the odds are against being long just about anything right now. Obviously, the major indices will eventually find areas of price support and stabilize. But it's dangerous to try to pick a bottom when the broad market has not even given any signals that the heavy selling is finished. When stocks eventually do show signs of forming at least a short-term bottom, we will be looking to buy the sectors that showed the most relative strength during the sell-off.

In addition to Alternative Energy, the Biotech sector is one sector to watch on the long side. Stocks such as Genentech (DNA), Biogen (BIIB), Celgene (CELG), and Genzyme (GENZ) are all moving in the opposite direction of the market. The iShares Nasdaq Biotech (IBB) and the Biotech HOLDR (BBH) both look decent for short-term momentum entries above yesterday's highs, but be sure to keep a tight stop in case the broad market decides to collapse again. Advanced traders may also be interested in a short-term long entry in the Semiconductor HOLDR (SMH), which bounced off support of its 50-day MA yesterday. If buying SMH, it is probably best suited as just a daytrade. We are currently flat, letting the market settle a bit, before making our next move.

Open ETF positions:

Long - (none)
Short - (none)

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.