Friday, September 23, 2011

Morning Update/ Market Thread 9/23 - Breakdown Edition…

Good Morning,

Equities are lower this morning adding to yesterday’s rout. The dollar is lower, bonds are even higher still (as if that's possible), oil is down, gold & silver are breaking down, and food commodities are also lower.

There’s no significant economic data today, so let’s take a look at yesterday’s breakdown…

All the major indices were hit hard, with many making new closing lows below the August lows, such as the Transports:

That’s a clear flag on the Transports, bearish. The Industrials got close to a new closing low but the late day bounce kept it above 10,719 – a close below there today will produce a minor degree DOW Theory sell confirmation:

The SPX is in the same condition as the DOW, very close to closing below the August lows, but obviously breaking down from more of a flag formation:

The BKX and XLF showed how hard the financials got hit. They closed well below the bottom Bollinger band, so expect them to float back to at least that band today.

Funny listening to CNBS yesterday… an ad kept repeating about how smart this investment company is and how strongly they recommend Emerging Markets over the developed world. Of course I was looking at the EEM breakdown even more strongly than the developed markets, they are simply way more volatile and they are certainly not immune to the problems associated with global debt saturation:

This morning the VIX is still above the upper Bollinger, it may take a little time to turn it up and to turn the rest down. Regardless, the market experienced a significant technical breakdown. The SPX flag pattern is targeting about 1,000, although there is pretty strong support at 1,050 and at 1,020.

When I zoom out to a two year chart, I can’t help but see a large potential H&S pattern. This is a very typical topping pattern – the left shoulder is clear, as is the head. The neckline may be just above the 1,000 area and that looks like where we are headed. If this pattern plays out, it may need time for the right shoulder to develop, so we may not drop below that neckline for some time. In fact, the left shoulder took the best part of a year to form. The rule on these patterns is that the larger they are time wise, the more reliable the pattern is. This one has not yet made the right shoulder, so is supposition so far:

Hope everyone has a good weekend! Those who are real can sleep well…