From The Rising of the Lark to the Lodging of the Lamb

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William Shakespeare

Even with the small bounce in certain commodities-gold, silver, oil, coffee, sugar, etc., the cycle of deterioration in the market remained in gear mainly due to a reiteration of low inflation expectations or worse, deflation fears exacerbated by air strikes in Syria.

No surprise that the nastiest damage occurred in the small caps. Monday night I wrote that given the fundamental shift in the phase to Bearish, we were not likely to see any rally or comeback until maybe Wednesday the earliest.

Interesting that Apple and Facebook firmed up in spite of everything. This makes the case for a mid to end of week short covering rallying and perhaps some fresh buying provided neither AAPL or FB collapse first.

DIA, SPY and QQQ although weaker as well, are in Bullish phases (SPY challenged its phase after the market closed). It is possible that the drop in their prices is in reaction to the small caps and that this correction is actually occurring through the IWM. In other words, IWM is the sacrificial lamb making this a real correction rather than the end game for this rally in the other indices all together.

It’s a theory and not one I would heavily stake on. However, we have been at these price levels in IWM in August, right before a huge rally. Just sayin.

One other important aspect is if the sectors noted below that are close to their 50 DMAs hold up-this will be a crucial point over the next couple of days.

S&P 500 (SPY) The 50 DMA is 197.78 up from yesterday because it is sloping up. At this point, we still have to call this a very healthy correction with the small caps diversion. At least until we confirm into a worsened phase

Russell 2000 (IWM) Confirmed bearish phase. Approaching August lows and oversold territory

Dow (DIA) 170 back to the important pivotal area with the 50 DMA just beneath. Certainly have damage here with the strong reversal from the highs. Still waiting for the fat lady to officially sing though

Nasdaq (QQQ) Best shape and best hope if this can clear 99.50

XLF (Financials) September low 23.19

KRE (Regional Banks) Today’s low down to around 38, if this has a chance of holding, is key support

SMH (Semiconductors) The 50 DMA is 50.02 and 50 has a psychological ring to it!

IYT (Transportation) Also approaching the 50 DMA

IBB (Biotechnology) Watching to see if this can hang out around 272

XRT (Retail) Unconfirmed warning phase-the big concern concerning

IYR (Real Estate) Best news is the approaching support on the monthly moving average

ITB (US Home Construction) 23.00 support for the August hit

GLD Ran to resistance-if cannot clear over 118.05 probably a good short

Metals and Mining (XME) Oversold and a weak bounce

USO (US Oil Fund) Under 34.00 more downside expected

XLE (Energy) Dropped to the 200 DMA and registering oversold-

TBT (Ultrashort Lehman 20+ Year Treasuries) TLTs back up brushing the 50 DMA

UUP (Dollar Bull) 22.75 is resistance

IFN (India Fund Inc.) Holding up better than most

FXI (China Large Cap Fund) That island top I wrote about in early September haunting this chart. However, I like where it’s holding versus July low