This was a wild and wicked week for the bulls. They saw losses not seen in a very long time. A day where the Dow was down 512 points. On that same day, the S&P 500 was down an amazing 60 points, while the Nasdaq was down an astonishing 136 points. It made you look a few times, and say, Am I really seeing this? Did this actually take place? With enough bad news coming in from Europe and the United States based on economic reports, the market simply gave it up without much of a fight. When the market crashed out on Thursday, which saw all support go away, particularly massive long-term support at S&P 500 1249, the volume increased, which unquestionably confirmed the price action.
The bulls would have loved the breakdown below 1249 S&P 500 to have been done with light volume, and a not so bad advance decline line, but that wasn’t what occurred. The breakdown was the real deal with the market making the transition for now from bull market behavior to bear market behavior where rallies are sold instead of pullback’s being bought. The breakdown is new, and thus, the bulls can hope we somehow smash back through 1249, but that chore won’t be an easy one. They’re going to need some fantastic news to get that job done. Where that can come from is a mystery to me.
We know that fed Bernanke will try to get something done to turn the tide back in the favor of the bulls, but I really can’t imagine what bullets he has left, except for another QE program. You do what you have to do, I guess. I can’t guarantee he’ll do that, but you have to think he’s going to try something. This market looks like it’s definitely going to need something sooner than later. The week saw bad news become a reality for the bulls, and a gift for the bears. Those bears are now in full control of things. While that can change, for now you have to respect the message. The bears have control for the first time in a very long time. Adjust accordingly.
The market finally got a bid today, but it came only when the daily index charts flashed a once in a very long time 18 RSI across the board. Normally you bounce hard from 30 RSI’s, if not higher, once you’re in a bull market. You really never even get to 30 on the RSI when things are healthy for the bulls. The fact that we got to 18 on those daily charts is an indication as to how badly broken things are in this market. We got to near 30 on those RSI’s, and then things turned back down some. We are still only in the 20’s on those readings, thus, we should still see some upside action in the days ahead, but not the type of upside action to get excited about. The RSI’s should not exceed 50 on the daily charts on any rally attempt.
It probably won’t get that high on any rally, but that should be the top if it gets that high. When markets become more bearish in nature, they tend to get oversold and stay that way for long periods of time, with the occasional rally to unwind them when they get violently oversold as they got today. So, now we know what we’re up against with the market. We can expect longer periods of oversold, but it’s still best to short only when things unwind from oversold to neutral. The oscillators told a bearish story today.
Although we had a nice rally off the lows today, one thing remained a constant, and that’s the overall action in the world of the financials. Sure, they came off the lows some, but they massively under performed. Stocks like Bank of America Corporation (BAC) are disappearing before our eyes. Down another 7.36% today. The under performance there, again, tells us what’s at hand here. The world is deflating, and the masses don’t like what they see with regards to financial headaches ahead. Citigroup, Inc. (C) and others continue to erode as well. These are major financial institutions that are disappearing before our eyes. Citigroup was down 4% today and is trading at 3.33. It did a 10/1 reverse split out of desperation, thus, it’s really trading at 3.33. Not much left there. If the market was healthy, and things were good on the economic front, these stocks would be leading higher, but instead, they’re leading lower. This is the one area you’ll probably want to avoid as much as possible if you want to think about going long. The financials continue to paint a very bearish back drop to what’s going on in the world.
When I study the leading stocks all over this market place from Joy Global, Inc. (JOYG) to Caterpillar Inc. (CAT) to Netflix, Inc. (NFLX) to Walter Energy, Inc. (WLT) to KLA-Tencor Corporation (KLAC), and everywhere else, things look terrible. The charts are broken with big gap downs, multiple gaps that is, on large volume. Technical damage everywhere you turn. These charts won’t repair easily as they are set up to move lower on any back test of those gaps lower.
The real problem is that many of these stocks are confirming the breakdowns with big volume. This means bears will step in on back tests of resistance once support. This also means it’ll take unforeseen news to allow these stocks to get healthy again in the near-term. Once broken, it takes a long time to repair. It just doesn’t blast back up out of nowhere. These are processes over time. So, that alone will keep the markets struggling for the near-term. The charts look bad, and probably will get worse over time before the repairing process can kick in.
Everyone is talking on the television financial stations about capitulation. That the ultimate bottom is likely in. I don’t think so based on the current action. It’s always possible, of course, and we are due for the oversold rally that I’ve spoken about, but this notion that all is well is ridiculous. It’s not. It may be fine in time, but right now it’s not. It amazes me how all anyone talks about is buy stocks now, and the worst is basically over.
Based on what? Because you want them to be?
We are just getting major technical breakdowns. I don’t think things repair themselves quite that fast. It’s dangerous to be running in just because these talking heads want you in. Be careful here. While a rally is expected, this market is broken here, and we don’t know just how low things will go. For now, things look bad, so buy with extreme caution if you want to listen to them, or to your own instincts. Do what feels right to you, but I think major caution is advisable. Have a great weekend and we’ll see how it goes next week.
Peace,
Jack