Outside Down Day

Top Line: The stock market was off to the races early in the day with oil down about $10 before the market opened. The celebration lasted about fifteen minutes before the turn around came. Persistent selling for most of the rest of the day left the Dow precariously positioned for a severe selloff.

When the market starts out strong and ends weak, it is generally bearish and can be an outside down day if certain criteria are met. Key characteristics of an outside down day that the prices have to be higher than yesterday's high at some point during the day, preferably the morning, and then close lower than yesterday's low. But, regardless if Tuesday was an outside down day or not, it certainly was a reversal to the downside day.

When the crowd woke up on Tuesday, it found out that the predicted, expected results of Gustav were not occurring. They also woke up to find that the stock market was rushing off without them so they had to get on board, too. Unfortunately, the early morning buyers were followed by even more sellers and the market dropped.

We read the early stories about the stock market rallying on lower oil and then the later stories about the stock market reversal. Those stories didn't know what to make of the decline in prices because as luck would have it oil was Not rallying to cause stocks to fall. This continues to be a problem. When studying the moves of any market, the media rarely knows what to make of it. What makes "sense" to them is that higher oil should be harmful to stocks but the facts just haven't borne that out. It just happens that markets sometimes move together and sometimes they don't. Simple correlations do Not work for trading.

What we mentioned back in our August 24th post, Kiss of Death, Technically Speaking, that the chart showed that prices had cut through an up trendline and had then come back to that up sloping line from the underside to "kiss" it goodbye. Since that Friday (August 22nd), the market has touched that line two more times, Tuesday's strong opening should be the last.

The last month and a half has been a buildup to this trading day. With Tuesday's reversal, we may have entered the downtrend we have been expecting for several weeks now. The market normally is weak in September, not always, but usually. The mantra is that you should Sell in May and go away Until September or October.

What was strong today? That would be banks and home builders...with oil services down hard.

We are getting close to a large selloff and we are going to have to be prepared for covering our shorts and getting long. We were in too much haste when we established our short positions and didn't get the best prices for our entrance. We want to be handle this better this time. We will prepare for it over the coming two weeks and then see how it works.

FSI: 80.72 (lowest close since August 4th)

VXO: 23.84 +1.25 (heading up to 50)

SDS: 65.95 +0.84
QID: 43.40 +1.09

Dow Industrials: 11,516.92 -27.04