Stock Market Viewpoint

Stock Market Viewpoint
Reading the Tea Leaves...

Monday, August 23, 2010

Risk to the downside escalates

click on images above to enlarge

Today the market climbed during the morning until we came up to the bottom line of the brown mother channel in chart 4 row 1 of the lower cluster.  As soon as it touched its underside the market rolled over and sold hard.  This is a classic retest of the breach of that lower channel line. The market has now done a confirmation of it's lower channel line failure.

Looking at the upper chart cluster, we see that today's S&P failure caused the "line retest" in the VIX and in bonds that I have mentioned I would be watching for.  In row 3 we see that the bonds sat down on the upper channel line it broke out of and pushed back upward from it   - The Retest.    In row 2 we see that the VIX/fear also retested up from the blue upper channel line.  This is where I drew the number 3 sell line (#4 is the thickest line and the biggest sell signal)  on both the bonds chart and the VIX/fear chart and transferred it up into the top row S&P chart.  The risk of losing money now greatly outweighs the risk of missing out on upside gain.

Looking at the lower chart cluster now, in chart 1 of  row 1 we see the follow thru of the red 5 ma line being forced down thru the pink 50 and the orange 324.  I added a new chart right next to it that isolates the red 5ma and the green 10ma lines.  When the red 5 line is above the green 10 it uses bounces off of the green 10 line to send it higher, as we saw three times in July.  Now the red 5 line is underneath the green 10 line & will use each brush against the green 10 line to send the market lower, possibly multiple times. (three red-green interactions is by far the most common pattern, when going up and when going down.

In chart 3 of row 1 we see that the brown 100 day moving average line is threatening to cross down through the black 200 day moving average line. The last time this happened was on Jan 3, 2008.  A 14 month down leg in the market followed. If this 100 line does down cross in the next few days, like all other ma crosses  the brown 100 line would need to come back up and do a retest pushdown from the lower side of the black 200 line before it is confirmed, which could take a week or two or more. Still though if the down cross happens it is a huge red flag before we even see if it confirms.

In row 2 we see the tiny 2 day red ascension channel failed this afternoon, sending the advance-decline on the path back down to the bottom as can be seen in Row 3 chart 2 just below it.

The flight to bonds is quickly becoming a panic to bonds, to avoid the potential downside risk of the stock market now that it's daily chart is broken.  Where the next intervention by the bail out teams happens is anybody's guess. It could be tomorrow morning. The effectiveness of each new bailout attempt is becoming less and less effective each time it is done, though.

I should go ahead and mention price patterns also. The biggest price pattern sell signal is the "Head & Shoulders" pattern. It is named that because it is has 3 up moves in the market back to back, with the center move going higher than the first and the last. Hence the "head and shoulders" name.  If you look at Row 2 of the lower cluster you can see that we have developed that pattern.  The left shoulder goes from July 8 to July 22.  The head goes from July 23 to Aug 12.  The right shoulder goes from Aug 13 to today.  The neckline of the head and shoulders is at 1065, if we fail that number on the S&P convincingly, 80% of the time the selloff will go down as far as the height of the top of the head which is at 1128.  So 1128 minus 1065 is a potential 63 point drop in the S&P which would take us right down to the S&P 1000 level which should be at least good short term support.  Notice that I marked the July 19 low with a red line at the 1057 level.  I am expecting the bailout team to defend that level vigorously but if they fail it's reasonable to expect the full downside measure that the head & shoulders pattern computates.


P.S.  In the lower chart cluster, in row 1, chart 3 todays candle wont print. All of the professonal data services are having overload trouble with their feeds.  The entire planet is logged in and the professional maket data services are having serious trouble handling it, causing in and out failures of various indicators.  I whited out the OBV in the chart just in front of it,  it too is having constant problems. This only happens at truely historic pivot points in the market.
I have sold all 3 of my current trades, as they have broke down with the market.

Also, I will be posting a good number of the 20 year "is your stock overextended?" charts this evening into the blank blog post space I have already created just below this posting.  Anyone who has any stocks they would like for me to include can email me the symbols and I will post them also.
Additionally, tomorrow morning we get the existing home sales numbers. The consensus is that they will be bad enough to cause another market opening smackdown.  The housing maket is dragging down the economy and the economy is dragging down the stock market.  Fasten your seatbelts.

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