From the get-go the market experienced heavy volume selling as the market reacts to the possibility of another economic downturn. Yesterday the Federal Reserve said it would reinvest its mortgage holdings to US Treasuries. Initially, the market cheered the move, but today clearly the market did not like what the central bank had to say. Small caps once again fared the worse as the Russell 2000 closed down 4% on the day. The Dow dropped more than 265 points finishing down 2.49%. Today’s breakdown is a warning sign of things to come, especially when the move was accompanied with heavy volume. Do not hope, this market is unforgiving and you should take the necessary precautions.
The major indexes are now below their respective 200 day moving averages with the NASDAQ taking out its 50dma too. Not only are they below them they broke down from the averages today. Back in early July the market failed to complete the head and shoulders pattern, but now have gone onto form a second shoulder. No one knows where we are heading from here, but judging by the amount of selling today any rebound here would have to be super powerful to get the bulls back in charge.
Traders will certainly be focused in on tomorrow’s jobless claims numbers. The issue with jobless claims figures is they do not include those job seekers who have given up. Once again, we would need a massive reversal on above average volume. In the meantime, the major averages are hinting we have lower prices in store for the market. Even today a few leaders were hit hard and even though they are still above their key moving averages the big volume selling can not be ignored. If more leaders fall in the coming days it’ll mean this correction will go deeper.
It appears the July 2010 lows is where the market wants to go, but the question will be like May and June will the market find support? This question the market will answer in the coming days, but anticipating a turn will be like trying to catch a falling knife. Many times in our market commentaries we have warned about trying to catch a falling knife as it is not a highly probable trade. Majority of the time what is seemingly a cheap stock will get cheaper blowing up your trade. Stick to the highly probable trades rather than plugging your nose and jumping into a stock trying to find a bottom.
This market is in a correction and it will take us to find buyers supporting this market in big, big volume. In the meantime, cash continues to be king until this market can find proper footing.
Disclosure: Long EZCH PWER