Wednesday, October 21, 2009

Another Important Reversal Day

Top Line: The stock market had a outside down day which is a bearish sign. We look for further confirmation of downside.

Outside down days are technically bearish due to what they imply. That being, early strength leading to late weakness, which is exactly what happened. Both ends of the day seemed to be driven by news about WFC (Wells Fargo). Early in the day, WFC announced blowout earnings and late in the day an important analyst downgraded the stock. So, news was a driver in this outside down day which doesn't sit well with us but we will definitely take the downside.

This action should be followed by further downside and it should come immediately. The technical picture is ripe with downside potential. Look at a chart and you can see that this vertical run looks very brittle. The possibility exists that the entire rise from the March lows is over today. Yes, we have said that before but that doesn't mean that it's wrong. In fact the next down move could be very destructive to stocks so to side step that move would be ok.

The volatility indexes were some of today's standout performers. The VXO dipped below 20 before blasting higher in the final hour. This is a meaningful reversal and gives us confirmation of the down move that happened in the stock market.

As for our gold mining stock proxy, GDX, it traded to 49 this morning just shy of last week's highs before dropping to close a little lower at 47.39. This reversal was strong but not as strong as the outside down day we saw in the major indexes. GDX started down in the early part of the day and could not get back below those opening lows, still, a strong reversal along with the stock market.

The dollar is the holdout in today's events. It too had a reversal but not as strong as we would have liked to have seen. There are so many dollar bears out there. Take a look at the news. It is unanimously negative. We can only ask why the dollar isn't much lower if all that is said is true.

Today's reversal is the clearest signal we have seen recently to indicate that the market may finally be ready to head south. We will continue to watch this move and see if it does develop into a lasting sell off. We said in our last post there is some pent up selling that could occur in a hurry. We are short already so that wouldn't bother us too much...but as you know we are certainly not very profitable over the past couple of months.

Listen to the market telling you to be cautious. Sell your long positions. The risk is too much to keep your positions.


Anonymous said...

Friday morning 15 minutes after the opening bell:

As the market opened this morning after earnings results from AMZN and MSFT, there was a possibility that the outside down day reversal that we saw on Wednesday may have been negated. This would have happened by breaking those highs set a couple of days ago.

The early morning pre-market trading indicated a strong opening when the bell rang but the early spike failed to best the highs set on Wednesday.

This result is still tenuous because it is early on Friday but the power that "seems" to be there has not produced higher prices. The market is getting very tired and if it can Not get higher than Wednesday's prices, that would be a very negative sign.

We will stick with Wednesday's reversal as our high for the market for this move. A failure today would of course need to be followed by a sustained sell off but that's for another day.

Our advice would be to sell more of your bull positions especially the way the market is acting this morning.

Sell strength.


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