Another fireworks day. The crash update from Sunday was unfortunately the correct call. However, we did see some interesting action yesterday. The market gapped down pretty heavily yesterday morning and was down from the jump nearly 200 on the Dow. This acceleration continued all day until about 3pm when the Dow was down nearly 800 points. Mind you, this was the largest intraday move down ever. From this low, the Dow rallied 500 points before pulling back a few on the close. There were massive reversals in the daily charts yesterday. We will need some confirmation in the next day or two to confirm what we saw on yesterday's close; we are not out of the woods yet but it's looking better.
There was something different about yesterday, I smelled the fear, there was quite a bit of blood in the streets. At one point, there were 1600 new lows on the NYSE, there was a volume ratio of 100:1 down/up volume, and the VIX climbed up near 60.
If you watch the news channels, it literally feels like the world is coming to an end. There is severe panic out there. CNBC brought a level of fear out yesterday that I have never seen from it before.
When I look through some of the sectors out there, it is clear to see that there was massive deleveraging going on to shore up liquidity for some of these strapped hedge funds. Just take a look at some of the darlings from a couple months ago: ANR, MOS, POT, CHK, RIMM, AAPL, etc. The list goes on. Absolute capitulation in many of these stocks.
The best case scenario for the bulls today would be for a gap higher, thereby creating a morningstar candle formation. This is an extremely powerful reversal signal, especially when it comes at support. We have been watching UYG very closely all the way down here. It has held up extremely well in the face of this madness and its single leveraged counterpart, XLF has held up even better. The chart on UYG is set up for a bear trap. The bulls could break the back of the bear, at least for the short term, if they stage a strong gap on the open.
The S&P 500 & Dow Jones printed similar candles but I like the banking sector the best at this point. UYG is holding up at critical support levels with shrinkage in volume and price support. Let's see if they can push it out of here today.
Disclosure: Long UYG.
