Recent Market Internals Suggest Further Movement to the Downside

Includes: DIA, QQQ, SPY
by: StockMarketCookBook

The major market indexes have broken key support levels. Yesterday, the VIX, the market volatility index, leaped above its recent support level and the TRIN, the Arms Index, also made a dramatic climb. What this all means is that the grinch might indeed steal this year’s holiday rally from underneath the tree. Let’s take a quick look at the charts (click on all to enlarge).

S&P 500
Here’s the 60 minute chart:

SPX Chart 10-26-09

The index broke its 1078 support level yesterday. Next stop is around 1060 and below that is 1025.

Dow Transports
The Dow Transports, the DTX, is generally considered a leading market indicator. We saw it break support at 390 followed by the 378 level yesterday. Not good. Next key level is 358.

DTX Chart 10-26-09

The volatility index, the VIX, generally moves opposite to the overall direction of the market. A falling VIX is a sign of growing investor confidence (although an extremely low VIX can signal complacency which can be dangerous). The VIX broke through major support at 40 following the market low in March and has been falling steadily since. It touched 20 last week, its lowest level in well over a year, and has been testing that level until today when it gapped up and through two minor resistance levels.

Support and resistance levels aren’t as meaningful for the VIX as for the other indexes; rather, it’s the overall direction of the VIX that we should be concerned with. A rising VIX signals a falling market. It’s really that simple.

VIX Chart 10-26-09

Market Actions
The market internals of the past two days suggest further movement to the downside. I would recommend lightening up on long positions and/or buying put options as protection. Those with more risk tolerance can start playing the market to the downside.

That’s it for today. I’m dashing off to a 100 Women in Hedge Funds panel discussion to find out what will be the investing themes for 2010. I’ll let you know what the panelists think. The event is in downtown Los Angeles. I’m giving myself 2 1/2 hours to get there (it’s all of 17 miles away) and am hoping that will be enough time. I probably don’t need to mention that traffic in LA is a nightmare…