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A Shot Over the Bow of the USS 'Buy the Dip'

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On the eighth day of October and the eighth day of the government shutdown, a straw broke the back of the momentum camel. Momentum stocks met the other side of the sword.
The fat lady has been gargling for the last week with the S&P 500 (INDEXSP:.INX) probing its May high, but she sang on Tuesday and the high pitch of her synchronous risk off note-shattered momentum names across the board.
The plunge looks like it shattered the technicals of many high flyers leaving them in shards of uncertainty.
Glamours that got clobbered include Facebook (NASDAQ:FB) (-5.2%), Netflix (NASDAQ:NFLX) (-4.7%), Yelp (NYSE:YELP) (-9.3%), Group (NASDAQ:WWWW) (-10.2%), and LinkedIn (NYSE:LNKD) -7%.
Daily Facebook Chart from September:

Daily Netflix Chart from September:

Daily Yelp Chart from September:

Daily Chart from September:

Daily LinkedIn Chart from September:

Sweet Chinese names that soured yesterday include Baidu (NASDAQ:BIDU) (-6.2%), SINA Corporation (NASDAQ:SINA) (-7.5%), YY Inc. (NASDAQ:YY) (-7.3%), and (NASDAQ:SOHU) (-5.1%).
Daily Baidu Chart from September: 

Daily SINA Corporation Chart from September:

Daily YY Chart from September: 

Daily Chart from September:

Before the open, we sent an alert noting the TNT sell setup in LinkedIn.
10-min LinkedIn Chart:

While many names were pernicious plumb line drops off recent highs with little distribution and little warning, LinkedIn had carved out multiple distribution days. And, as offered recently in this space, Facebook had satisfied a potential time and price square-out. Importantly, Facebook has been the poster child and epicenter for what is probably the most abrupt paradigm shift in sentiment ever.
Netflix also demonstrates an iconic round-trip chart in sentiment going from 53 to 334 in a year, which exemplifies how much the run from last November resembles 1999.
Netflix Weekly Chart from July 2011:

Note what looks to be bearish Train Tracks on the weekly Netflix chart that may ultimately define a declining phase.
Although LinkedIn showed some conspicuous distribution prior to Tuesday’s plunge, the rout in the glamours was far from limited to LinkedIn.
It’s hard to find a culprit or a catalyst to pin the air coming out of the concept stocks on. And, that may be the most bearish thing about Tuesday’s break in these names. There was no news to rationalize why they decided to give up the ghost yesterday. They didn’t gap down for the most part. Like the indices, they didn’t sound an alarm with a big gap down on the open. Most opened relatively flat, and the selling picked up like a snowball from hell. It was like a whiff of algo napalm in the morning as if some lynchpin in the robots triggered "risk off" all at once.
However, as noted in yesterday’s report, there was a change in character in Monday’s behavior: A week ago on Monday, stocks gapped down and crawled their way back, while this Monday, stocks gapped down, bounced, but faltered again, ending at session lows. That "stealth" change in character may have disheartened the bulls enough to incentivize their selling agenda for Tuesday. Rather than hit the bid from the get-go and flag their selling M.O., apparently they just kept feeding stock out till it fed on itself and players saw that the jig was up -- at least as far as the day was concerned.
But, underpinning yesterday’s selling in the high flyers was what I warned about on Monday, that the door may not be big enough for all those sitting on large unrealized gains in the beginning of the last quarter who want to get out simultaneously.
The song remains the same: while it can be dangerous to short on valuation, it can be just as dangerous to buy a stock forgetting valuation.
Yesterday, I came across a comment by one pundit who has been around for a while who opined, “Correction is spelled o-p-p-o-r-t-u-n-i-t-y.” So, my question is, when does correction NOT spell opportunity?
Was yesterday a shot over the bow of the USS Buy The Dip (BTD)?
Was yesterday the whites of the eyes of the potential "massive failure" that we pointed to on Monday? A massive failure following a massive false breakout on the Bernanke Taper Twerk? From BTD to BTT?
Just as the media was extolling how strong the market was carving out an unusual, unseasonal rally stretch in September, a funny thing happened on the way to the October forum: the momentum gladiators have run into a coliseum of lions as the Neros fiddle while Washington burns.
As noted in this space of late, the S&P 500 and the Dow Jones Industrial Average (INDEXDJX:.DJI) have been negatively diverging from the NASDAQ Composite (INDEXNASDAQ:.IXIC) and the Russell 2000 (INDEXRUSSELL:RUT), where the vast majority of these momentum names trade.
Yesterday, the NASDAQ and Russell played fast-and-furious Ketchup with the S&P and the Dow. The NASDAQ and the Russell, along with the S&P, all left Expansion Pivot sell signals.
An Expansion Pivot sell signal is a move below (or above in the case of buys) the 50-day moving average on the largest range in 10 days.
In so doing, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) snapped a rising trendline from last November.
SPY Chart:

Paralleling a trendline connecting the April and June lows with a trendline connecting this year's tops ties to 160 on the SPY (1600 cash). As noted, earlier this week, 1600ish ties to October 28, the crash day in 1929. And, as we have walked through in this space, there are several time and price harmonics that tie this October to the Octobers of 84 and 26 years ago identified by the Square of 9 Wheel. So, caveat emptor. This may be business as usual and just another buying opportunity …but, if so, from what level? Moreover, the popular consensus seems to be that this is just one more case of political brinksmanship in Washington in which a last minute deal is cobbled out with the can kicked down the road to perdition. Up until yesterday, it felt like there was entirely too much complacency around this notion that it’s business as usual on Wall Street and in Washington.
A daily Russell chart from November shows an Expansion Pivot sell signal and a nominal break of a trendline connecting the June and August lows.
RUT Chart:

A trendline paralleled off the tops is just below while the Russell has downside room before satisfying a trendline from the November low.
On Tuesday, the NASDAQ also left an Expansion Pivot sell signal and in so doing snapped a trendline connecting the June and August lows.
NAZ Chart:

A rising trendline from last November parallels the upper rail of a channel connecting this year's highs. Follow through below the 50 DMA implies there is downside room to 3600.
Note that the NASDAQ "flushed its 50" in April and again in June. The NASDAQ has not truly undercut its 50 DMA enough this time around to suggest climatic action. Moreover, the NASDAQ shows a three drives to a possible culminating high this year, so this correction may be larger than previous selloffs this year.
Conclusion: October is Boo’s month, and he’s not lying down on the job of spooking the markets. At the same time, October is associated with many buying opportunities. We are near the anniversary of the 2002 bear market low (which also ties to the anniversary of the 2007 pre-crash top). October 8 is 90 degrees square a price of 1655, which was the low print and the close for the S&P yesterday. It was a large-range decliner and may have been climatic enough in the very short run to elicit a rally attempt as this time and price harmonic is respected. But this October could be a particularly long month, and I wouldn’t jump the gun. I’d keep your buying powder dry -- at least on a swing and overnight basis. If you’re nimble, there may be opportunistic long-side tries. That said, remember that up opens are NOT the stuff of sustainable upside reversals following large-range decliners. Upside reversals typically are derived from DOWN opens on the heels of large distribution days.
Strategy: 180 degrees down from the high and 50% of the range (from the June low to the September high) ties to 1645, so we may see an Up-Down-Up Sequence play out before a meaningful snapback. A break below 1645 paves the way for 1600. A break of 1600 suggests a full test of the June low. A break of the June low triggers the 13-year Megaphone Top.

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POSITION:  No positions in stocks mentioned.