The market was set-up to try higher and form a right shoulder. It was excited over the prospects of huge job growth, especially in the private sector where it matters most. A strong close Thursday with MACD’s crossing set it all up. The time came for the big surprise that would shock the bears and allow the bulls to celebrate an expanding economy. Then reality hit. No growth. No job creation in the private sector. Stimulus doing nothing big picture, which it never does, of course. The market futures imploded once the jobs number came out. 200,000 below most whisper numbers on the top line and about 60,000 below expectations for the private sector. Dow futures were down 60 before the report came out on European fears and went to down near 200 once the number came out.
The gap down was initially bought up through most of the first hour. Every push down was bought up allowing the market to print hollow red candles for the first hour meaning on balance buyers after the initial gap lower. However, after the first hour went away the market came down hard again and basically put in a trend down day from there on in. All of the indexes closed just off their lows as we some short covering in the final five minutes but the losses were still very nasty across the board. A little over 3% on the S&P 500 and Dow and nearly 4% on the Nasdaq. Quite the day.
When markets fall hard, or if they rise hard, you want to look at the internals to see if they’re confirming the move. It’s critical that when we look at the advance/decline line we see that on a day such as Friday, it wasn’t just a few bad losers bringing things down. That would not confirm the hard push down. If we saw a few big heavyweights making up a good percentage of the move down it would say things aren’t as bad as they look.
When we look at Friday’s numbers we see that the NYSE saw Nasdaq, both were flashing 8 losers for every 1 winner. Yes folks, that’s confirmation and says Friday’s selling was widespread thus the real deal and not to be ignored. Volume also increased across the board when compared to the recent up days thus this too says things are not good for the bulls. The internals say take note of Friday’s action. Don’t ignore it. Respect it for sure and adjust your thinking accordingly.
There was one strong critical breakdown Friday that was posted. The BKX, or the proxy for the bank stocks, plummeted down and broke a one-year plus trend line. When you have a sector that kept exploding higher, such as the BKX did every time it touched that trend line, you need to think how important it is that it broke down Friday in a big way. The message is clear and it’s not a good one for the bulls. Because that trend line had been so powerful you have to wonder just how much worse things can get now that it’s no longer on the side of the bulls.
When trend lines run in one direction for an extended period, it’s really interesting to see that trend break. It means that up side action on the banks is going to be labored and weak at best and that there’s a lot more potential down side than many bulls would like to think is possible. The SPY also lost its lower trend line off the 60- chart and the S&P 500 closed below the 50- and 70-week exponential moving average for the first time in a very long time and this says that the market is entering a particularly weak stage in its process. In the past, closed below these 50- and 70-day exponential weekly moving averages has meant down side was the likely course of action over the next many weeks and months. The market is going to need some very special news and fast to get back above or things could get very nasty quite quickly.
Let’s talk about S&P 500 1040. The low in February was 1040 while the low in May was 1044. A perfect double bottom. This level is also a neck line in a large head-and-shoulders pattern. Should we close below 1040 on the S&P 500, especially if we do so with some force, the market door is open to dramatically lower levels. 860 is the measurement but you can’t count on a perfect move lower to an exact measurement.
The point is we have to watch this level closely as it separates a bad market from a terrible one. We did close three points lower Friday than the low established since we lost the 200-day exponential moving average on the S&P 500. The old low at 1067.95. We closed Friday at 1064.88. So, although we haven’t lost 1040 yet, we did make a new closing low in this pattern. Not good for the bulls. Friday’s action opens the door to yet another 1040 test in time and for the sake of the bulls, it better hold.
Another problem for the bulls is how fast the 20-day is catching up to the 200 day-exponential moving average. You never want to see the 20’s cross the 200’s but it’s now only seven points away. In addition, now that the 20’s have caught up to the 200’s we have triple resistance all at the same level, which means the bulls have big headaches. It was bad enough having gap at S&P 500 110 and the 200-day at 1101, but now with the 20’s at 1107, you can add that to the story of bad news for the bulls.
Getting through 1100 now with all this resistance right above and with the jobs report telling us we have major economic problems, will be very difficult, to be kind with the English language. Things don’t look good here folks to tell like it is. There is the possibility that we will see much lower prices in the weeks and months ahead with the usual rallies mixed in. Please be prepared for the real possibility.
On that note, enjoy your family and friends this weekend. Enjoy life and recognize what’s really important. If you’re lucky enough to be around children, inhale it in. It’ll give you some real perspective about the nonsense of this market.
Peace,
Jack
The Banking Sector definitely had a bad day Friday. Goldman Sachs Group, Inc. (GS), Bank of America Corporation (BAC), JPMorgan Chase & Co. (JPM), Wells Fargo & Company (WFC), and others in this sector were down significantly Friday.
The iPath Dow Jones – UBS Copper Subindex Total Return ETN (JJC) chart shows copper, a leading economic indicator, continues to breakdown on strong volume.
