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Morning Cup of Jo: Take No Prisoners!

By

Yesterday's action is not something to be taken lightly and repairing the damage will take more than just a day or a week.

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"A wise man does not expose himself needlessly to danger, since there are few things for which he cares sufficiently."
(Aristotle)



Key Points:

  • Many catalysts blamed for yesterday's sell off
  • $600 Billion lost in market value
  • Bottom end of channels broken
  • Secondary Indicators at extreme levels
  • Stay in touch with the updated Eye on the Ball for ST support and resistance levels


Market Commentary

Former Federal Reserve Chairman Alan Greenspan's comments suggesting the possibility of an impending recession, Iran's decision to continue its uranium enrichment program, China's Shanghai market down almost 9%, attempted assassination of Vice President Cheney in Afghanistan, Durable Goods tumbling 7.8% or this morning's expected downward revision of 4th quarter GDP from 3.5% to 2.2%. You name it; it played a role as a catalyst in yesterday's tremendous sell off.

According to Bloomberg, yesterday's market implosion erased $600 billion in market value. The DJIA closed down 416 points (3.29%), the SPX closed down 50.33 points (3.5%), the NDX closed down 96.56 points (3.9%) and the RUS closed down 31 points (3.77%). As you have already heard over the last 18 hours, it was the worst one day drop in points since the market reopened after 9/11. On a percentage basis it was the worst one day drop since March of 2003.

The two eldest sisters are now trading negative YTD as the NDX and RUS are toeing the flat line. I don't want to belabor the point about the drop, nor pretend I am smart enough to continue the search for a catalyst. Rather, I'll spend the remainder covering potential technical action which may follow such a day. Realizing this morning's pre-market time is crucial I'll attempt to be brief.

In the last 'Jo' my firm changed our "Eye On the Ball" section to reflect the new ST and IT support levels in the markets to adjust for the upward sloping channels of the two eldest sisters and overviewed the accompanying charts. The comment I made at the time noted:

"The DJIA and SPX are both trading in ascending channels, hence the tight range. Below you can plainly see if these tight ranges are broken a different market tone will be afoot.

If the DJIA and SPX bust their respective 50-DMA's, which correspond to the support of their upward sloping channels, the following IT (Intermediate Term) support, reported in the previous Eye on the Ball (12,340 and 1,404), will be the next level to contend with. As you may remember these equate to a horizontal Floors & Ceilings support.
"


In the Week in Review on Friday I talked about caution and concern resurfacing. "…if the bottom-end of the channels are broken then the probabilities significantly increase for a multi-month consolidation."

Accordingly, my firm sincerely hopes our readers pay close attention to our commentary and the technical levels we post on the Four Sisters. Hence, much of yesterday's pain should have been minimized.

As for the new levels (what was once support, now becomes resistance)…

Once the upward sloping channel was broke the spigots opened. The DJIA seemed to find support around 12,100 (546 points intraday) just after the 3:00 pm plunge partially caused by a computer glitch at Dow Jones & Co. (see article for full explanation). The following chart does not depict volume – probably another computer glitch. However, I can say this; the NYSE volume hit an all time high of 2.4 billion shares traded which I'll revisit briefly.



The SPX was much of the same and once breaking the channel's bottom it also closed below our previous IT support level mentioned at 1,404.



The NDX, on a technical basis, faired somewhat better. Although dropping by the largest percentage of all the sisters, it managed to hold the neckline of 1,740 – 1,745.



The RUS, also dropping substantially, has re-entered the base and should find support somewhere around 770.



The reason I only put "one-liners" for every graph is because I wanted to briefly discuss a larger issue. As a technical company, days like yesterday with the extreme secondary indicators going off the charts – such as the VIX, the TRIN, the A/D line, the Put/Call ratio, etc. – this could be construed as a buying signal. Let there be NO mistake! These indicators should only be deemed a buying signal after a correction has already occurred. When this happens after a long run-up it traditionally indicates a highly probable change in the overall trend.

As far as today and the remainder of the week go, you should expect much of the same highly volatile and whipsaw action. I would watch the new levels in the Eye on the Ball section above for the next ST support levels.

Yesterday's action is not something to be taken lightly and repairing the damage will take more than just a day or a week.

Stay tuned and good luck!

No positions in stocks mentioned.

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