Monday, August 17, 2009

State of the Market - 8/17/09

A terrible start to the week today for the bulls on Wall Street, as stocks gapped down, sold off hard for the first fifteen or so minutes of trading, and could not manage to bounce back into the close, finishing near their lows for the day. The indices put in large losses across the board and those losses came on heavier volume, which will give them another distribution day, bringing the total to four in the past few weeks based on my count. All in all, a very bad day that from the looks of it will start a meaningful correction over the short-term at least, if not longer.

Technically, it is never good to see key support broken with a gap, and that's exactly what happened today. The numbers I posted in the video last night (985 and 1962) where never even challenged and both the Nasdaq and S&P are now below their short-term moving averages. The action looks particularly bearish on the Nasdaq, where the gap looks like a possible breakaway move to the downside. When you add in a breakdown in the financials(XLF), possible breakaway gaps in XLE, OIH, and RTH, along with a gap up in the dollar (UUP), it does not paint a pretty picture right now for this market, at least over the next week or so. The only bright spot is that crude oil did come off of its lows and the dollar did reverse off its highs, but there is little doubt a lot of technical damage was done today.

This is not to say that we are going to be testing the March lows in another two weeks or anything like that. After the move put in over the past six or so months, it is perfectly normal to get a 10% or more pullback, which is what we could see here. It may not even been that big percentage-wise. As I showed last night, there is a TON of support stacking up in the 950 area on the S&P and 1880 area on the Nasdaq. I didn't even see the uptrend lines (until now) that also coincide with these areas, which just adds another layer of potential support. Because of this, a pullback here will likely be a good thing as long as these levels hold. I will likely be a buyer in that area as of now, as we will likely approach it with oversold readings. We are somewhat oversold currently on the McClellan. If that area happens to not hold, then this market becomes an entirely different story.

S&P 500
Charts from Telechart, Courtesy of Worden Brothers, Inc.

I did nothing today other than thank my stops for getting me out of my positions last week and into 100% cash. I didn't short anything as I never like shorting a gap down, and will likely not short anything the rest of this week. I showed a few setups on the video last night, but they aren't there as a whole yet and if indeed this is a more intermediate-term correction rather than a short-term one, they will need some time to setup into ones I like. Although I may play that 950 area long, I do think doing nothing is the best play here. I had quite a few breakdowns from my long watchlist last night and I see absolutely none that interest me after today.

That's about it for today - a really bad day overall for the bulls but as long as they defend that key area I mentioned earlier, then I still believe they are in control of this market longer-term. Short-term, they are in for a little more selling, at least it seems that way after today. We'll see if the bears follow-through tomorrow I guess. Take care and good luck.

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