It was not surprising that stocks retraced some of their huge gains of the preceding two days, but the extent of yesterday's sharp pullback was undoubtedly more than the bulls wanted to see. After opening near the flat line, the major indices trended steadily lower throughout the entire session. The Dow Jones Industrial Average shed 3.3%, the S&P 500 3.8%, and the Nasdaq Composite 4.2%. Small and mid-cap stocks, which showed the most relative strength during the recent rally, sold off the most. The Russell 2000 and S&P Midcap 400 indices lost 4.4% and 4.7% respectively. All the main stock market indexes closed at their intraday lows.

One positive of yesterday's session is that turnover receded substantially. Total volume in the NYSE decreased 53% below last Friday's frantic pace, while volume in the Nasdaq ticked 51% lower. Trading in the previous session was inflated by "quadruple witching" options expiration day, but yesterday's volume in both exchanges was still so light that it fell below 50-day average levels for the first time in two weeks. Although the percentage losses in the stock market were large, the sharply lower volume tells us institutions were not running for the exit doors. Declining volume in the NYSE exceeded advancing volume by a margin of 4 to 1. The Nasdaq adv/dec ratio was negative by nearly 6 to 1.

In yesterday morning's Wagner Daily, we said the following, "Over the next several days, we would like to see the main stock market indexes gently retrace some of their recent gains, or at least consolidate in a tight, sideways range. Such price action would cause "bull flag" patterns to form on their daily charts. If that occurs, we would also expect some new bullish ETF chart patterns to emerge." Given that the major indices rallied more than 8% in the preceding two days, a pullback of 1% to 2% would have been considered "gentle." However, yesterday's losses in the S&P 500 and Dow Jones Industrial Average caused both indexes to surrender all of last Friday's gains. The Nasdaq Composite fared even worse, erasing all of the previous day's gain and nearly 1% more.

Despite yesterday's sell-off, it's definitely too early to say the rally attempt off last week's lows is dead. Measuring the depth of the pullback, from the intraday low of September 18 to the intraday high of September 19, the main stock market indexes retraced to just above or below the 50% Fibonacci retracement level. This is shown on the short-term hourly charts of the S&P 500 and Nasdaq Composite below: