Monday, October 26, 2009

State of the Market - 10/26/09

Well, if you watched this weekend video, you know that conditions were ripe for some more whipsaw action on Wall Street, and that's exactly what we saw today. Stocks started higher and things looked good for about the first two or so hours of trading. Right before lunch, however, the bottom fell out, with the Nasdaq falling over 40 points and the S&P falling over 20 points very quickly. The market moved sideways from there into the close, but most of the damage was done by that point and a late bounce attempt was quickly extinguished, which let the market close near its lows. I don't have the final volume totals but it doesn't look like volume was overwhelming, which is the only bright spot in today's selling if it holds that way.

Technically, we have now seen four consecutive days where the market finished with reversal bars. Three of those were bearish reversals, and with the key support around 1080 and 2150 being broken decisively, it certainly looks like we are topping here. Further selling here followed by a weak bounce could form another (dare I say it) potential head and shoulder pattern on most indices, but we've seen how that has worked out before, so who knows?

As for support, the Nasdaq closed right at the uptrend line of its bearish wedge and right at its 20 day moving average. A close below 2130 would likely set off a move lower to around 2080 near its 50 day moving average. The market could bounce there, but if this wedge is broken to the downside, then I think the pullback will get more severe. The S&P closed right near the trendline of its bearish wedge as well but has support below much closer around 1047 (50 day moving average). That is a key level to watch. Overall, with both indices closing right near their uptrend lines, a bounce is a possibility soon, but not a given.

I talked about the financials last night as well and how bad they looked, and they are sitting right at their 50 day moving average as of now as well, a key support level. If XLF breaks this current $14.70 area, it could fall down into the $13.60-13.75 area pretty easily. The real story today was the move in the U.S. dollar, which was also discussed last night. It hasn't quite broken above the bullish wedge pattern it is forming, but if the dollar sees any follow-through to today's move, then things will likely get worse for the overall market. Volume on UUP was the highest ever today. Crude oil was hit big today, although USO bounced off of the $40 level. That is very important support and if it is broken, things could get worse for the commodities. The VIX also spiked back into its range so that's another bearish signal popping up.

As I said last night, the signals are certainly lining up for a meaningful correction to take place. Will it happen? I wish I knew. This market has shown setups like this many times before this year, with bearish volume patterns and negative divergences drawing in bears and then trapping them when the market bounced back up. One of these days, the bounce that has occurred so many times before will not take place and we will get a meaningful pullback. I don't know if it will be this time. As I said, the signals are there. But after being burned several times before, I am hesistant to trust those signals this time. Watch carefully and be careful is probably the only advice I can give right here due to past precedence from this year. It may be safer to wait for a breakdown and then short the following bounce to avoid getting whipsawed like traders did back at the beginning of July and the end of September.

That's about it for today - we'll see what tomorrow brings and if we get some follow-through by the bears. They have a chance right now - will they take advantage of it, something that have not been able to do up to this point? That's the million dollar question. Take care and good luck Tuesday.


CW, Porland OR said...

good report

Lee said...

Mac great posts as usual. Enjoy reading your blog. I think they are going to trap for numerous reasons and one I strongly believe will occur, is to keep market participants happy financialy so that a good holiday season is assured. You pull the plug now, people will not spend this season. Just my thoughts.....

Mac said...

Thanks guys. Lee, you could certainly be right - we are almost through the typically bearish time of the year. It's a tough call - can "they" keep grinding this thing higher and higher in the face of all these divergences and distribution. IBD said the S&P now has NINE distribution days. That's a ton. We'll see.