- Sellers trump again, take SP500 through the bottom of its range.
- No news, just no buyers.
- Portugal takes bailout funds as the EU bailout saga continues.
- Four sharp sessions lower leaves the market oversold and SP500 below its range: now watch for how the market tests.

MARKET SUMMARY

Another downside dump now challenges the overall rally since early 2009

There was no real news to start the new week, and that can be good or it can be bad depending upon the market’s psyche.  After a Friday that saw a weak jobs report capping 5 months of weakening economic data, the lack of any positives gave buyers no reason to step into the breach.  They didn’t and stocks sold hard once more: NASDAQ -1.1%; SP500 -1.1%; DJ30 -0.5%; SP600 -1.4%; SOX -0.75%.

The only news of note was analyst comments about certain sectors or stocks.  Airlines were downgraded due to rising fuel costs.  Of course this comes out as oil peaks and fuel costs are on the decline.  Pretty good contrary indicator.  Banks and financials were on the defensive as WFC received a downgrade.  That was pretty much it as far as the news.

Futures were just modestly lower and stocks opened with slight losses.  At the end of the first hour the indices attempted a short double bottom right at 1294, SP500′s support at the bottom of its range.  They even broke higher off of that pattern.  Didn’t take, however.  As lunch began on the east coast the market rebound peaked.  With 2.5 hours in the session it tested SP500 1294 once more.  It held . . . but a modest bounce rolled over after a half hour and the selling was on.  The rest of the session stocks sold, making lower highs and lower lows, never challenging the early session highs and never posting any serious attempt upside in the entire afternoon session.  There was a late bounce but SP500 1290 stopped that move and stocks slid lower to close.

Buyers only made a cursory attempt at holding SP500 at that prior support in the trading range.  They are beaten down right now, an obvious take from a look at the charts.

Thus two steps of the process are completed, i.e. a test of the bottom of the range and then a break of that level.  It could have held but it didn’t so now you look to how SP500 tests the break: a rebound that fails or a rebound that breaks back into the range and holds, that false breakdown. 

TUESDAY

No news once more, leaving the market to fend for itself as it continues digesting 5 months of weaker economic data topped by a lackluster jobs report.  With that king of lead in, no wonder the stock market is threatening a serious breakdown.

Tuesday brings us to the next step as noted above.  For NASDAQ and the Dow they will try to hold the line while SP500 tried to rebound to test the break of support.  That SP500 move is the key given it is the leader, the dubious downside leader, that is.  If it can muster the strength to test, and you would assume that after the tail-kicking it received to this point, it either bounces and stalls at or near the old support, bounces through it and stalls and breaks back down, or it breaks through and manages to hold a test and from there bounces up in the range.

After four downside sessions, three sharply so, the stock market is in position to bounce from this oversold condition that leaves NASDAQ and the Dow at support, SP500 breaking below it.  Doesn’t mean it will do that, but the odds are it should.  Still we had to close several positions that were not holding support.  May bounce back on us but that happens. 

There are stocks still in position to rally and you can enter if they bounce along with the market.  Thing is, the market is going to bounce in relief and the reaction to the old support level for SP500 is really the key, not the bounce.  That is where the market tells its plans.

What do you do now?  We made money on the QID, SPY, NTES positions on the way down, and if there is another downside move then we should take part of the gain on other downside plays and anticipate a bounce, likely coming intraday after any further selloff.  No downside from here; still have to wait for the bounce after this kind of selling.

So, that means not a lot to do in terms of buying up or down.  Doesn’t mean we can’t or won’t pick up some choice plays if they bounce.  Strong leaders will hold support and continue their moves, and that can make us money.  Moreover, you can take a flier or two on some index options or some stocks that move well that are in the bottom of their ranges.

What do we expect?  Expectations mean little in the market, but after this sharp, deep selloff that still has NASDAQ and DJ30 at the bottom of their ranges, it is a good time to take some chances on some upside as noted above.  Not loading the boat, just buying this big dip and looking for some quick rebound plays. 

In short, trades for the near term bounce, more patience for longer term position trades, waiting to see what happens with the test of the break lower by SP500.  Little or no downside follow through that yields a recovery of the support level is a cue to play a move up inside the range.  The quicker that turn, the better, i.e. tomorrow is best whether some further selling and a reversal or just a bounce higher from the Monday close.