After two days of destruction, triggered by yet another Fed rate hike and the prospects of yet another potentially catastrophic hurricane, the tone of the market has changed dramatically.  Amazing how fast that happens isn’t it.  Just 48 hours ago the tone of the market was fairly positive and the indices looked healthy.  That was then.  With significant technical damage done and last lines of defense (key support lines) confronted, it doesn’t look good for the bulls.  Granted we’re probably due for a bounce at key support levels here (which I’ll discuss below), but the intensity of the selling is indicating this rally is in big trouble.  It would take a small miracle to bounce quickly from here and hold at these levels.  Stranger things have happened.  We find ourselves in a nearly identical situation as just a couple weeks ago when the market was in danger of heading for the toilet when inexplicably, the market rallied back above support levels despite the worst hurricane in history.  It’s often said that history repeats itself, but I don’t see that happening for a second time.  This market needed an easing of interest rates (or at the very least some discussion that it might happen in the near future) and didn’t get it.  Gold is rallying.  Most consumer related industries are broken, housing is cracking and semis are on their way.  Jeez.. and to think I’m an optimist.

You can see from the chart below that the naz is bearing down on key support around 2100.  I would expect some sort of bounce around this level initially, but if it can’t hold there look for support in the areas of 2075 (200 DMA) and finally 2050.  Although yesterday’s move can’t be considered a day of distribution, the selling was still well above average.  Ugly any way you look at it.

The Dow is also bearing down on its trend line (it actually broke through a bit) as sell volume surges.  If it can’t hold here, there is minor support at 10,200, but Dow 10,000 becomes a very real possibility.

While the S&P also plummeted below the first line of defense of the 50 day moving average, it still has support (just barely) of the intermediate trend line.  Expect a continuation of deterioration this morning below this key support level, but its important that the S&P close the day above this line today.  Note the increasing sell volume as institutions head for the exits.

"A market shrouded under the mystery umbrella of Greenspan and Co. gave way to certainty as the bulls roared ahead toward new highs on news that rates (for a moment) will stay in place. "

That’s not the most likely headline for tomorrow, but hey I’m an optimist. I believe that at this point, the upside potential of the market is far greater than the downside potential.  With one more trading day before the Fed decision, the major indices are in decent shape as both the Dow and S&P surged off support on Friday.  The Nasdaq looks a bit weaker, but all in all still looks fairly healthy.  Sure, much of the volume surge on Friday could be attributed to options expiration and S&P reshuffling, but the way the market escalated higher without turning back after lunch on Friday was impressive and the confirmed breakout of the market on September 6^th remains intact.  We await the Fed….. but with another hurricane bearing down, the uncertainty will remain.  Lets just pray that it spares the coast from another round of destruction.  Until next time….

In the past several days, the major indices have been hanging on to support by a fingernail.. until yesterday afternoon.  A late day surge in crude and renewed inflation worries sent stocks reeling and the major indices below key support levels once again, settting the stage for further deterioration.  With the number of distribution days beginning to pile up (3 in last 2 weeks and 5 this month by my count) its clear insitutions have been taking profits off the table in August, typically not a good month for the market.  Despite the overall weakness, leading stocks have actually fared quite well (if you’ve been looking at the SelfInvestors.com Leading Stock index lately you’ve noticed that selling volume to the downside has been light), but if yesterdays move isn’t just a quick head fake, then it wont be long before market leaders take a significant beating as well.  Don’t be on the wrong side of that move.  Be vigilant about preserving cash for next move up.  Happy trading!

Lets take a look at the charts.

The Nasdaq violated its intermediate upward trend line several days ago, but has been finding support at the 50 day moving average.  With each day of distribution though, it becomes unlikely that the next level of support can hold.  While, the Naz is hanging on to the 50 day, yesterdays high volume reversal indicates that support level is in danger as well, setting the stage for a drop to the next important level – 2100.

The Dow just flat out looks ugly.  It broke key support around the convergence of the 50 and 200 day moving averages with heavy volume.  There may be support around 10,200, but that hasn’t been a major level of support in the past.  At this point, you certainly can’t rule out a 4 to 5% move to major support around Dow 10,000.  I’d certainly be betting that the Dow will hit 10,000 before it hits 11,000 at this stage of the game.

The S&P also violated a key support level yesterday, when it broke below the area around support of the 50 day moving average and the upward trend line.  The move makes it very likely that we will see a test of the next level of support in the area around 1190 – 1200.