Stocks traded off sharply on Tuesday, as all major indices fell one percent or more. The markets gapped down at the open, found footing around 11:30 am, and consolidated at the lows for the remainder of the session. The DJIA is on the brink of losing a critical six day support level. The small-cap Russell 2000 and the S&P MidCap 400 were the most resilient, but they still shed 1% and 1.1% respectively. The Nasdaq led the decline by shedding 1.5%. Close behind were the Dow Jones Industrial Average and the S&P 500. The Dow slid 1.3%, while the S&P 500 ended the day down 1.4%. Losses were widespread across virtually all industry groups.

Volume was up on Tuesday. The NYSE saw a significant increase in volume of 13%, while Nasdaq volume was up only slightly. However, both indices experienced significant selling pressure, as declining volume overwhelmed advancing volume on the session. On the NYSE down volume overshadowed up volume by a 10 to 1 ratio. The Nasdaq saw declining volume outpace advancing volume by a factor of 5 to 1. Given the internals and the price action, Tuesday was clearly a distribution day.

Although we don’t regularly track the NYSE, it is of significance that it closed below its 50-day MA for the first time since late August. The DJIA is also toying with a key support level. For the third time in the past six trading days, the Dow dropped below 11,000 but managed to rally back to close above this key mark. A break below the six day low of 10,978 would likely result in further broad based distribution. The next significant support below the November 16th low is 10,750. A lesser support level exists at 10,870. Despite the strong selling, this is just the first test of the 50-day MA in almost three months. Given the length of the most recent advance, the current price action is not particularly unusual or unexpected.

In the November 23rd newsletter we stated, “The market continues to show indecision. Choosing trade setups that are exhibiting relative strength or relative weakness when the market is in flux, provides the opportunity to enter a position without taking on exorbitant risk in the event of a sharp reversal. Further, if the market remains in a trading range, strong ETFs will generally rally and weak ETFs will generally decline.” This comment was made in reference to the relative weakness exhibited by the iShares MSCI Spain Index ETF (NYSE:EWP), and the relative strength demonstrated by the JPMorgan Alerian MLP Index ETN (NYSE:AMJ). We placed both on the watchlist. Unfortunately, the short entry trigger for EWP was nullified because it gapped more than 1% below our price trigger. Market volatility often makes it difficult to enter quality setups. On the other hand, AMJ demonstrated tremendous relative strength on Tuesday. Irrespective of the heavy selling in the market, AMJ held its four day trading range and closed near the intraday high. Further, at no time during this market correction has AMJ closed below the 20-day MA.

Due to market conditions, many potential setups have been neutralized. Further, we are not inclined to make new calls going into the holiday. There are no new watchlist candidates for today’s newsletter.

NOTE:The U.S. markets will be closed Thursday, November 25, in celebration of Thanksgiving Day, and will finish at 1:00 pm ET on November 26. Accordingly, The Wagner Daily will not be published on Thursday, and an abbreviated version will be sent on November 26. Enjoy the holiday with your family and friends.

Deron Wagner is the Founder and Head Portfolio Manager of Morpheus Trading Group, a capital management and trader education firm launched in 2001. Wagner is the author of the best-selling book, Trading ETFs: Gaining An Edge With Technical Analysis (Bloomberg Press, August 2008), and also appears in the popular DVD video, Sector Trading Strategies (Marketplace Books, June 2002). He is also co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. Wagner is a frequent guest speaker at various trading and financial conferences around the world, and can be reached by sending e-mail to: deron@morpheustrading.com.

NYSE:AMJ, NYSE:EWP