I couldn’t think of a good title for this post, so I thought I’d just throw in my prediction for today’s NFC championship.  Go Seahawks! 

Friday’s surprising sell off was reminiscent of an annoying in law that drops by for an unexpected visit.  Muddy feet up on the coffee table, half drunk on Pabst blue ribbon shouting expletives at a Jerry Springer rerun loud enough for the neighbors to hear.  Just when you think it can’t get any worse it does.  I don’t think there was a trader out there who wasn’t surprised by the action on Friday, especially considering the way the market previously bounced back from the poor results released from Intel and Yahoo two days earlier and the subsequent follow through the day after with increasing volume.  The continuation of the rally was in place, or so it seemed.  Equally disappointing results out of Citigroup and GE proved to be the back breaker on Friday, as doubts about the strength of the economy crept into the minds of investors.  Add to that worries over Iran, oil supply disruption in Nigeria, the inverted yield curve and all of a sudden you have a market on shaky ground.  Amazing how fast sentiment can change isn’t it?  I suppose that’s what makes the markets so fascinating. 

I think it’s important to remain even keeled and realize that the market isn’t as in bad a shape as the drop on Friday would have you believe.  Some of that move was surely the result of options expiration which can magnify the move.  SOME support remains in place as well.  At the same time, the move on Friday should instill some concern and cause for caution.  The technical damage done was significant and it can’t be ignored.  I for one had plans of increasingly leveraging with margin provided the healthy consolidation continued.  It’s safe to say my strategy has changed in one day from aggressive buying to a more defensive approach.

So where do we go from here?  Nobody can be sure, but looking at the charts of the major indices may provide some clues.

The Nasdaq continues to be the healthiest of the major indices.  Important to note is that it closed right at support of the 50 day moving average on Friday and volume came in lighter than the day before, so no distribution for the Nasdaq.  More encouraging is that the buy volume during the advance in the first days of January clearly overshadows the amount of sell volume of last week.  However, with support at the 50 day moving average on shaky ground, you have to look at where the next level of support may be, which in the case of the Nasdaq lies in the area of 2200.  Another 50 point drop.

The DOW which sliced through 2 major levels of support on Friday, is another story.  The big blue chips have been lagging for years and they lead the decline once again.  Look at the difference in buy and sell volume in the Nasdaq and Dow since January 1^st.  That is quite a difference!  The DOW looks mighty sick right here and a drop to around 10550 looks inevitable.

The S&P in terms of price action is following a similar path to the Nasdaq, but with a more bearish tone in its buy/sell volume.  It’s also right at support of the 50 day moving average.  Next level of support is around 1250 if it can’t hold there.  I  think it’s safe to assume we will test that level in the coming days at least for a brief moment.  That may happen Monday.

I don’t think too many could have predicted the kind of results that Intel and Yahoo posted after the bell.  I know I was suprised.   At the very least I thought maybe they post average results.. but they were far from average.  Intel’s results were awful and Yahoo missed analyst estimates by a penny, but wasn’t even close to the whisper number of .19/share by posting .16/share.  IBM fared a bit better, but revenue numbers missed.  It was a good ‘ol fashioned after the bell tech wreck.  Obviously the market is going to get hit at the open tomorrow, but the important thing is how it closes.  The market will face some important tests of support in the coming days.  First levels of support in both the Nasdaq and S&P should provide us with clues as to the magnitude and duration of this pull back. Lets’ have a look…

The Nasdaq has led the way to start the year and there isn’t any reason for concern up through today’s action with orderly consolidation.  Today, the selling volume wasn’t particularly intense and much of the losses were erased by the end of the day.  It may be a different story tomorrow.  In the coming days, support levels around 2278-2280 could come into play, so it will be important to see how the Nasdaq responds at that level.  If it can’t hold that level, the likelihood of a drop to the 50 day moving average becomes more likely.   Let’s see how volume comes in tomorrow .. I have a feeling we’ll get the first day of institutional selling of the new year. 

It’s a similar scenario for the S&P as it nears the first level of support around 1275.  Bouncing from there would be considered a bullish move, but if it can’t hold chances are good it will test the 50 day moving average as well.  We shall see.

The area to watch now in the Dow is 10800 at the 50 day moving average.  However it could dip below and also test the previous area of consolidation around 10700.