No Time For Complacency

What a difference a day can make! Last night as we were writing the post, there was still a little bit of a question about the near term of the market. Tonight we have seen another significant reversal of fortunes in the market. Putting these two days together you get a very bearish picture. The news was that the Dallas Fed president Richard Fisher said the Fed needed to stay the course in its fight against inflation. So, if the market truly sold off due to that news, we should see a good rebound Wednesday. Otherwise, maybe it wasn’t the news after all but a weak market. We will soon know, even if we don’t know Wednesday.

In other news, the New York Times had a front page article on the New York housing market saying that is had stalled a little bit. In the past quarter, the average sales prices had dropped 12.7% but that year over year they had still risen 10%. One other key point was that that the time it took to sell a home was up 30.4% in the last quarter. And, as a side comment, the article mentioned that the insiders at big home builders have sold almost $1 billion worth of stock this year... The cracks are beginning to appear...

Looking at our current favorite index, NDX, the NASDAQ 100, we get a good idea of the kind of day we had. If you look at the (java) chart, the most important chart tonight is the six month daily chart and here are the highlights as we see them. Back on August 2nd and 3rd, the NDX traded at 1628, the highest levels since the end of the year highs around 1635. On September 13th, the NDX traded to a high of 1619. These are the last two pronounced highs in this index. Today we saw a big move up in the morning to take the index up to almost 1618. There it seemed to hit a brick wall; we call it resistance, the resistance that two prior peaks created. The point being that it failed to get back to the previous high on both occasions. The same type of chart pattern exists on the SPX (SP500) and the INDU (Dow Industrials).

There are few other notes about this chart. If you consider a trendline, and you can actually draw it in with bigcharts.com, from the April 29th low spike through the July 7th low and then through the August 29th low, you will see that trendline broken decisively on September 21st. Then we see the market rally back up through the line and today it broke down through it again. This is another bearish chart pattern.

If you were to put in the 2 SMA (Simple Moving Averages) lines for 50 and 200 days like we usually do, you will see that the 200 day line has started down sometime around mid-month. This is just something else to notice. You shouldn’t buy a stock with a downward trending 200 day SMA, why should you own the index?

The last thing to look at is today’s key reversal (on heavy volume--not shown on the chart). You may want to pick a shorter time frame to see it closely but this is an outside down day, another very bearish chart pattern. An outside down day is the market peaking higher than the day before but closing below the prior day’s low price.

Well, the NDX has tipped its hand a little today. There does seem to be some underlying weakness in prices. We choose to get into the RYVNX inverse fund based on the NDX without seeing the last two days of trading because the evidence is mounting that the market is ready to roll over. Now that we’ve seen the past two days we are much more confident in our call.

If the long anticipation of a bullish stock market over the next few months turns into a downturn right here, then there are a number of traders on the wrong side of the move and there could be some serious dislocation. This could develop quickly. Please don’t wait too long to decide.

Dow Industrials: 10,441.11 -94.37 (Say good bye to 10,500 on 10-5)
RYVNX: 20.82 (not a bad first day)