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The T3 Morning Market Call: Outside Bearish Reversal Triggers Global Sell-Off


Pullbacks should be welcomed by bulls and bears alike.

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World markets reacted overnight to the major reversal in US markets yesterday and are down big this morning. Japan is getting hit the hardest, down around 7%, although it was up more than 50% for the year so far. The negative feedback loop also circled back to US futures, with the S&P e-minis down 15-18 handles this morning. Yesterday our firm noted the significance of yesterday's outside reversal, and topping tail candle, and now its validity is being confirmed by the sharp drop in the futures.

Yesterday we had a perfect storm scenario to finally trigger the long-awaited 2013 pullback. The market was very extended from its short-term moving averages and outside its Bollinger Bands, with the S&P (INDEXSP:.INX) up 18% in less than five months to start the year. Then, you had Fed Chairman Ben Bernanke testifying in front of Congress followed by the Fed minutes. Many investors, I think, were wary of those two events given the recent rhetoric about QE tapering, and it appears big institutional players elected to take some profits before and during those events yesterday.

If you had been carrying multiple long positions, it was prudent to book some profits at levels we saw yesterday morning. In fact, many prudent active traders may have already cleaned up many of their long positions given how far the market and individual stocks had run.

Now, the question is: How far will we pullback? Will we be reminded that we operate in a "stairs up, elevator down" market, and quickly give back much of the gains from May? We will first be watching the 21-day and 50-day moving averages in stocks and indices to see whether those levels can hold, and if they can't we will start looking deeper down the chart.

With the tempest set to hit the markets today, new data likely won't play a huge role in driving the action, but be aware that we have jobless claims at 8.30 a.m. ET and new home sales at 10 a.m. ET.

Pullbacks should be welcomed by bulls and bears alike. We like to see pullbacks as part of a healthy market cycle, because it gives us an opportunity to identify relative weakness. In today's session, keep a close eye on which sectors hold up best and bounce first.

The Financial Sector ETF (NYSEARCA:XLF) saw a push-through failure at $20.14 yesterday and touched its 8-day moving average at $19.75. The ETF put in a big engulfing bar as the banks showed some signs of exhaustion. The 21-day comes into play at $19.31. I will be very interested to see how the banks react, because they could very possibly show relative weakness today. Morgan Stanley (NYSE:MS) is one stock that I think could show weakness within the sector as well. Goldman Sachs (NYSE:GS) is also worth watching, as it can often lead the market up and then lead it down soon after.

The Industrials ETF (NYSEARCA:XLI) saw a push-through failure at $44.55 in the morning then the selling intensified in the afternoon and sent the stock all the way down to its 8-day MA. XLI had gave back the previous three sessions' gains. Could we see lower prices? The 21-day is curling up at $42.95.

The Russell 2000 ETF (NYSEARCA:IWM) also saw a push-through failure at $99.60 and has dipped below its 8-day after shedding 1.5% yesterday. The Russell 2000 ETF bounced back a little into the close, and put in a new pivot level at $97.11. Would the damage be contained at this level or will we see lower prices? The 21-day is standing at $96.35. Small-caps are often the first to get sold off when the market turns South, and the IWM has shown relative weakness during some of the shallow 2013 pullbacks. Watch to see if it shows relative weakness today.

The Retail Sector ETF (NYSEARCA:RTH) didn't see a big engulfing bar like other sectors but also touched its 8-day moving average. RTH has been climbing this key short-term moving average up. A break and close below this at $52.56 would take it to the 21-day at $51.76. Given the relative strength in this group, perhaps look for some of the strongest stocks within it for bounce plays. Under Armour (NYSE:UA) is one that has been extremely strong this year and could be a worthy dip buy.
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Scott Redler is long AAPL, BAC. Short SPY.
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