Off the Charts

The S&P 500 closed down nearly 3% today, with most of the heavy selling coming late in the afternoon following the Federal Reserve's controversial Operation Twist announcement. Yesterday's newsletter highlighted several push-through failures in leading stocks and the SPDR S&P 500 (SPY), which is a short-term sell signal that put traders on notice. The market remained slightly weak this morning, but the selling intensified following the Fed announcement around 2:30 p.m. EDT. The SPY has now erased key retracement levels from last week's move, and most stocks look broken. A few leading stocks dragged the indexes higher over the past few days, masking some lukewarm action in the rest of the market. The SPY is coming to test the lower end of the wedge that has highlighted for the last couple of weeks. It looked possible that we would break the wedge to the upside earlier this week, but after today's action, it seems more likely, once again, that this wedge will break to the downside. If you want to anticipate a break of the wedge, a short below $116 and a move through $114 will send more fear into the market. For the time-being, though, playing the extreme ends of this range has been the only strategy providing good risk-reward trades. SPY Source: eSignal View Chart » Below is a longer term view of the S&P 500. Since breaking the head-and-shoulders pattern at 1260, the market has been bear flagging below that level. If the S&P breaks this wedge to the downside, the measured move is down to last summer's low of 1010. 1140-1135 will be the last line of defense in the S&P, and then the 1101 low from August will come into play. Be aware of these levels. S&P 500 Source: eSignal View Chart » Over the past few weeks we have highlighted divergences between the credit and equity markets. The iShares Barclays 20+ Year Treasury Bond (TLT) had been flagging at highs, as noted in Off the Charts on September 14th, foreshadowing another move higher that would weigh on equities. TLT exploded after the Fed announcement and hardly pulled in at all. Over the course of the last two months, we have repeatedly seen the credit market be a huge inverse tell for equities, usually in a delayed reaction type of scenario. When the market began to firm up, but bonds kept ripping this afternoon, it told us that the real selling had hardly begun. Once the immediately post-announcement high-frequency trading (HFT) seemingly subsided, the real heavy selling ensued. TLT Source: eSignal View Chart » In the past month, we have highlighted weak stocks that weren't able to rally with the market and were creating bearish patterns on the charts. Some of these stocks started to break yesterday, like Molycorp (MCP) and Freeport-McMoRan (FCX); today other weak stocks started to break lower, like OIH, the financials, and the coals. It is good to highlight weak stocks because when the market has a potent down move like we saw today, these have a stronger acceleration to the downside. The Oil Services HOLDRs (OIH) has been targeted as a weak ETF for some time now. OIH was not able to rally when the market rallied, and when the S&P was testing the upper end of its wedge, OIH was hanging toward the lower end of its range. Today, OIH had a wide range bar through the break of the wedge at $125/$124.50. OIH closed the day down 5.36%. OIH Source: eSignal View Chart » The financials have been harped upon for some time now as a drag on the market, including on today's Morning Call. This morning, Moody's (MCO) downgraded the debt of Bank of America (BAC), Citi (C) and Wells Fargo (WFC) putting further pressure on the sector. The Financial Select Sector SPDR (XLF) is the ETF for the financial sector. Today, Goldman Sachs (GS) closed below the $100 psychological level at $97.76. J.P. Morgan (JPM), Morgan Stanley (MS) and Citi all closed at new 52-week lows today. The XLF is bear flagging on the daily, suggesting lower prices still to come. Given the concern central banks around the world are showing for the banking system, the story seems to fit. A Greek default would put major strain on the system. The most recent low in XLF is $ 11.81. XLF - Daily Source: eSignal View Chart » Below is a weekly chart of the XLF. This ETF broke its multiyear trendline in April 2011, four months before the S&P and other weak sectors. A measured move for the break of this bear flag on XLF takes this ETF to $9/$8.50. XLF - Weekly Source: eSignal View Chart » The chart of the Materials Select Sector SPDR (XLB) shows that the head-and-shoulders pattern in this ETF triggered before the S&P neckline break. XLB broke to the downside of the ascending channel on the daily, another bearish pattern that is triggering to the downside. Could the S&P follow it down again? XLB Source: eSignal View Chart » The stocks on the go-to list all had their time to shine in the past week as they provided traders with momentum trades through calculated buy prices and some even accelerated through 52-week highs. These stocks gave short-term sell signals yesterday and should be buyable on dips, but for now cash is king and it is wise to have high level stops on these positions if you have not already stopped yourself out of these positions. These stocks will always provide buying opportunities at some point. The Nasdaq has been the strongest index, as a lot of these stocks moved higher in the past week with the bounce in the market. The PowerShares QQQ (QQQ) also bounced stronger compared to the weak stocks and sectors that have been highlighted before. If you are long QQQ, use a high level stop on your position at $54.40/$54. As active traders, it is not necessary to hold the pain of a correction as we have the luxury to buy stocks back at lower prices when the chart confirms the action. QQQ Source: eSignal View Chart » Below is a weekly chart of Retail HOLDRs (RTH), the retail ETF. This ETF is holding up better than other ETF's in the market. A high level stop in RTH is at $104, as it is making lower highs on the chart, and if you want to give it more room, use $98 as your stop. RTH Source: eSignal View Chart »

Off the Charts

Selling intensified following the Fed's "Operation Twist" announcement.

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