Technicals Weakening

Lots happened today.

First, the Dow suffered its worst loss since July of 2009. Back in July, everyone was expecting a correction; a fact supported by a very well defined “head and shoulders” formation. We found out though that the market was not done in it’s massive rally. Point: while todays drop was indeed bearish, we need to be open to the fact that it could be simply a breather. Q3 earnings reports are coming up and could provide for bullish sentiment once again (when will the market look for improving revenues though?)

I believe though that we are getting closer and closer to a correction and this could be the beginning, though once again, we still could be in for another test of the highs (covering my bases).

Technically speaking, a rising bearish wedge pattern was completed by a break below the 1049 level on the S&P. Worse is the fact that it also happened to break under an important support level of 1040. This coincided with a stronger bullish break under the 3.30 for the 10 yr yield (a sign of increased risk aversion and deflationary fear; yields and prices are inverse to eachother). The VIX broke through a downward trend line in place since Mid May.

These breaks are pretty important, but there is still unfinished business for the bears. Oil did not confirm the move down and actually rose on the day (though it did break through it’s rising wedge pattern which started around July). Maybe it’s because of the geo-political tensions…but it’s worth keeping an eye on. The dollar rose as expected but we are looking for a break above the 77.50 to 77.80 range which represent both a resistance level and it’s 50 day moving average. Copper has been hanging around the 2.70/lb level… a break through this level would prove significant.

Fundamentally, car sales disappointed as expected. The ISM number, while strong did not beat raised expectations. Copper prices took a pretty big hit today on the factory inventory as well as rising inventories. While pending home sales did rise, continued worry regarding the expiring tax credit weighed. Regarding the pending home sales, we must keep in mind that while they have been expanding rapidly (at around an 18% annual clip), existing home sales are only rising at an 8% annualized rate, which signifies that lots of contracts are getting cancelled a large amount due to…..drum roll….the BANKS!!! Exactly the problem that Japan suffered during it’s lost decade. Speaking of loss decade, we are headed the same route already….

http://www.marketwatch.com/story/us-stock-market-risks-an-unprofitable-decade-2009-10-01

Jeez, the Japan parallels are becoming scary.

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