As 1040 S&P 500 got a workout over and over, the bulls seemed to find a way for things to hold just above on a closing basis. We got down there in January of this year and then came back for another test in May before trying three times in June with today being the magic breakdown day. The bulls fought hard and for that I give them credit. The bottom line is, however, that the bulls gave way today as the day came to an end. Yesterday was ominous in that the market made a large gap down right in front of those neck lines and ran things down below 1040 before recovering at the close with a final tally at 1041. Barely holding the line in the sand. As the market closed yesterday, we saw extremely oversold conditions on the 60-minute charts.

Just as I had told all of you to expect a quick bounce, it did take place early today. It took the 60-minute charts from extremely oversold to just oversold. No real relief yet we headed down hard as the day wound down. Late selling as usual. This once again takes our short-terms in to extremely oversold conditions but from a breakdown in the market. It tells you not to expect much in terms of bounces as the bears are now in total and complete control. With today’s action the bears have to be flexing their muscles in the mirror and feeling pretty good about things. Indeed they should.

Now we look at the pattern in place and try to understand where this market is headed. We know there’s one more gigantic report coming out before the market opens on Friday. The hugely anticipated and watched jobs report, which will tell us just how bad things are out there in terms of creation or lack thereof. If today’s ADP report is any indicator, we won’t be seeing anything positive for the market. Of course, this is what the ADP report is telling us but not necessarily what we’ll see. If the Government can find a way to tell us there’s some growth we could see quite a rally that will take us back above the 1040 level thus alleviating the angst the bulls are feeling this evening. If the numbers aren’t good there’s more than a reasonable chance we won’t be seeing 1040 on the S&P 500 any time soon. This report, to be blunt, is the last hope for the bulls. They need a home run. Not a single. Not a double. They need a Ruthian blast. You know the Government wants to report such a hit, but will the truth be so bad that even they can’t spin doctor this puppy? My guess is probably yes, but we have much to learn from this report. Even though things look great for the bears and awful for the bulls, there is yet still a drop of hope left for the bulls who tonight must feel like there’s no hope whatsoever.

Tonight you will see the usual number of charts, but take a look at how all those neck lines have been broken. This is no joke folks. If you don’t believe in charting, you better start. They have warned us things were not good and they now tell us that things are a lot worse than many want to accept. Never ignore messages such as these. I ask all of you to take time and look at these charts and the message they’re sending loud and clear.

These patterns took a long time to set up and are now just making their moves out of them. If they play out to the maximum level of points lower then we will be feeling some serious pain in our lives in terms of loss of jobs, foreclosures and the like. Unemployment will explode higher. Hours lost by those still with jobs will become a reality to many. Salary cuts as well. These charts say the losses in the stock market could be severe. Let’s just hope this doesn’t play out that way, and to ignore the charts would be a mistake. It tells us all, at the very least, to be extremely cautious and that maybe raising a little cash wouldn’t be a bad idea.

As the market lost the neck lines on key indexes, we also saw the advance/decline line plummet late day. It was positive for most of the day although volume was light on the buying relative to yesterday’s decline. That alone wasn’t good news but at least the advance/decline line was trying. That is, until the last hour when the market fell hard as did that advance/decline line as decliners led advancers by nearly 2/1 across the board. Not good to see follow-through to the downside on the majority of stocks. The internals have been eroding but after yesterday we can say they were out right nasty. Today was yet another confirmation. Nothing good today for the bulls in this arena.

Now let’s talk about sentiment and oversold. These are the two areas of the market that offer the best hope for the bulls that things can recover, although again, things are bad. Make sure you understand that. Whatever way you want to look around at everything out there, but be sure to give it its due. Paint things evenly as possible and show what’s good and bad for both sides, no matter what’s taking place.

The bull-bear spread is at only 8%, more bulls, and this is good for the bullish case longer-term as another leg down in this market would cause an inversion of too many bears over time. This would help the bear market not to get completely out of hand. In addition, when we focus on the short- to medium-term, we now see the daily charts flashing RSI’s in the lower 30’s. We know we don’t often see readings too far below 30 for very long except in the most severe of bear markets. We’ll be finding out soon enough if that’s what we’re in. If this is a normal bear then we should have a bounce up once we get near 990/1000 S&P 500. However, that bounce back would likely not be much more than a back test of S&P 500 1040. That’ll unwind oversold and allow for more selling.

Here’s the bottom line. You don’t want to spend too much time below S&P 500 1040. The longer we’re below that, the harder it will be to recover. If the jobs report is bad you won’t see 1040 for a very long time. Let’s hope for the people in this country that we don’t go in to another severe bear market although it is possible. Simply take measures to make sure you’re in good shape. Too much exposure doesn’t make too much sense on the long side, even if you’re a long-term investor, which I never recommend. Do what feels right to you but please respect the messages out there. If the jobs report is not well received, things could get really ugly around here.

Peace,

Jack

In additional to the other charts, look at the iShares Barclays 20+ Year Treasury Bond (TLT) Daily chart as flight to safety trade continues as money is leaving stocks and continues to crowd into bonds as seen in the TLT breakout move this week.