The market made a beautiful reversal on Friday off the 1040 test, finishing strong at the highs on expanding volume and on a very strong advance/decline line. It would have been normal to see some form of a retrace move today, but to do so on such light volume, and not have the bulls come in sooner, is surprising and disappointing for the bullish case. It would have taken, literally, just a drop of buying to defend at higher levels, but that just didn’t happen, and thus, the bulls should not be happy with themselves.
Today never saw a follow-through early on as we gapped lower. It tried to come back up a few times but never made it. Extremely light volume never stopped this day from ultimately being a trend down day. Closing on the lows makes you wonder how many people are really left in this market. The bear markets over the past few years taking their toll and we saw that today as there was no one around to step up and get in. The advance/decline line was poor but not at extremes. The bulls, on a day like today, should have taken that gap down and used it to buy stocks, or at the very least, hold the market up by holding at least 50% of Friday’s up move, but that was not the case.
What is the bigger picture message here when we study the market? It says there are lots of banks that will go under. Many institutions we know now may go away. The action daily in the banking and financial sector is scary. The semi-stocks also can’t find a sustainable bid day after day and week after week. They simply have small bounces and then trend lower. The erosion there is second only to those financials. Until either of those two sectors catch a strong bid, this market will be down trending overall. No sustainable upside at all as long as this continues.
With the economic news such as it is, things better change fast for the positive, or these sectors will erode rapidly as the buyers are basically gone now. Once that happens, the bears seize the day such as they have been doing. The longer it lasts the easier it is for the bears to keep control of things. We know there are some sectors hanging in there, but that’s temporary if we lose key support on the S&P 500, which is close at hand. These two sectors get going now, or soon enough the market will be broken below 1040 S&P 500.
When I study the short-term charts on the iShares Barclays 20+ Year Treas Bond (TLT), UltraShort 20+ Year Treasury ProShares (TBT) and regular sector charts, they don’t set up bearish. This is what bothers me at this moment. The price action in the market is absolutely awful, yet the short-term charts don’t set up as bearish. Any move lower will create yet another positive divergence. Oscillators will be very oversold again on those 60-minute charts at 1040 S&P 500 as well. This is why I think we wouldn’t test down there, but here we are only eight points away.
The short-term charts can be head fakes in the very worst of markets, but the daily charts don’t look that poor either. Nothing good, but not set up to break down quite yet. Nasdaq stochastic’s below 20. MACD buried well below zero and likely to diverge bullish if new lows are hit and the RIS is at 37. It just doesn’t feel like break down below 1040 time, yet the action is so poor technically, and thus, I will respect the price action message should we break. The bulls have little time left to allow for these technicals to play out. Do or die time for sure.
Below S&P 500 1040 is 1010. Below that is 950 down to 900. If we do break below 1040 with force, then you want to continue to take action about reducing long-term stock exposure. The only time you would want to deploy that money back in is if we get huge divergences across the board down the road, or when we can rally and take out the highest moving average on the S&P 500 and Nasdaq. Best to play things safely here and not get cute hoping. Hope doesn’t work. Continue to respect the message of the market and nothing else. I am not suggesting you have to remove all of your longer-term exposure, but I am suggesting that maybe you want to consider reducing it to whatever you’re happy with and that allows you to sleep at night if this market were to continue sharply lower from here.
I’ve included some charts tonight that show today’s bearish action. Have to call a spade a spade as they say. Remember, though, that it would take a move below 1040 S&P 500 to get this market rocking lower, further than we would like to think possible. I am showing these charts so you can see the possibilities if things break badly. You need to know what can be.
Peace,
Jack
