An Important Support Failure Occured Yesterday

We’ve looked and we just can’t find anything positive about yesterday’s index breakdown. The reasons why it occurred don’t matter nearly so much as how the market reacted to the reasons. Whether it be derivative issues, high oil prices, or speculation that the fed might overshoot on interest rates, the fact is the market sold off at support and it sold off hard. The toughest part about market analysis and the toughest part about trading is trying to determine whether a market pullback is just a simple bit of profit taking or whether it represents a character change. If it’s just profit taking you try not to fight it, but you don’t get aggressively short since it doesn’t take much to trigger a reversal. If it’s a character change, then you don’t know until you get some sort of confirmation. Yesterday provided confirmation that we are experiencing a character change from the bull trend started last April. We now know why August has been such a miserable month. Smart money has done a good job recently at hiding its intentions. They have been leaving small footprints, likely by setting up program trading to sell small amounts at daily price extremes. This has weakened the will of the buyers to the point that yesterday they had no more ammunition left when they were forced to defend the uptrend. We won’t make any projections at this point what sort of target to look for or how long this downtrend will persist. We need more information before we can do that; in other words, time. Right now the market is still very deeply near term oversold and due for a bounce. What changed after yesterday’s sell off however, is that now we need to use the bounce to find shorts. The sell off confirmed the downtrend and there is nothing worse than trying to fight against the trend. We’ve tried to avoid the trend all month by focusing on commodities, but even these areas are destabilizing. Oil, which sold off hard last week, is in the throws of a bounce here. We would argue that it looks like a topping pattern underway. Gold broke out a few weeks ago in what it turns out was merely a bull trap. The breakout failed this week and gold prices look to reestablish their downtrend or at least trade sideways for a while. Today we need to watch the market’s reaction to yesterday’s selling to see where to best position ourselves. Scans are not yet turning up strong short patterns and long patterns are not to be trusted for the time being. Note: Check the calendar for updated instructions on the stocks TSM and AEM. Likewise, we will be providing an email update on long term stocks to Gold and Bronze members today.