Welcome To The Slaughterhouse

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Lily Holbrook

If last Thursday’s railroad tracks on the charts of all indices were indeed that confirming sell signal, Friday provided confirmation with a lot less excitement when you compare the extreme volatility and ranges that preceded Friday’s action.

If one compares the market participants of last week to say spectators at the US Open Tennis Championship between Venus and Serena, one could seriously have suffered emotional whiplash. Therefore, Friday’s relatively (compared to 270 point moves up or down) calm action in the DIA, SPY and IWM were welcomed and maybe even somewhat anticlimactic.

NASDAQ, on the other hand, and abattoir in the same sentence comes to mind. Many of NASDAQs components such as Tesla, Twitter, Intel, plus certain tech names like Micron, made the relatively calm move lower in the Dow look milquetoast.

Pretty much everything though, did indeed close lower with the S&P 500 losing nearly 3% from the week prior and over 5% from the highs posted September 18th. From January 2014, SPY remains up just below 3% nevertheless, for how much longer?

The Russell’s already broke the 2014 lows to make new ones last week. The Dow and SPY landed on the 200 DMA, while QQQs can at least claim even with the horrific action on Friday, that it’s holding August lows.

In truth, everything looks so dreadful coming into this week, a further meltdown is likely even with the oversold conditions. As cash our only position in 2 of our models, we are well situated to sell into a rally or, look for signs of a bottom.

Those signs of a bottom remain constant and have served us well through the years-a blow off bottom with double or more the average daily volume (see comments on indices below), followed by 1-3 days of green candles and accumulation of volume, an island bottom confirmed, or a line in the sand support level that the market consolidates in, with an eventual breakout on good volume over that consolidation.

“No more ??? and no more doubt
you fall into the wishing well
you ??? into someone's spell that keeps you running in and out ???
???” Lily Holbrook, Welcome to the Slaughterhouse

S&P 500 (SPY) Support at the 200 DMA with double the average volume in place. Not to get excited, we will nonetheless begin to look for some signs of a bottom

Russell 2000 (IWM) This too had double the average daily volume. It’s also sitting on a key monthly moving average with 2 weeks left in October. So oversold, at this point, we will wait for a bounce

Dow (DIA) Broke the 200 DMA at the end of the day on Friday with nearly 3 times the average daily volume. Although this is now in an unconfirmed phase change to distribution, I would look her to see if we can start bottoming out around the 200 DMA

Nasdaq (QQQ) August lows 93.89 and also had double the average daily volume. Besides DIA, here is another place to start watching for signs of a bottom-til then equally oversold

XLF (Financials) 22.33 the 200 DMA

KRE (Regional Banks) I know there was call buying here on Friday and the candle is a classic inverted doji hammer-watch this

SMH (Semiconductors) RIP Semis-we do have about a 50% correction from the breakout in 2013 to the peak high in September worth noting

IYT (Transportation) On the 200 DMA

IBB (Biotechnology) 260 next level of support

IYR (Real Estate) outperforming but not giving me a warm. fuzzy

GLD 117.10 area is a good place to watch for a hold-still think this could try for 120 or so

OIH (Oil Services) 43.45 is a really good place for this to bottom out against-watching

TBT (Ultrashort Lehman 20+ Year Treasuries) TLTs not even close to the 2012 highs

UUP (Dollar Bull) I would not bet against the dollar here