Financials Confirm Downtrend in Taking Out March Lows

Kevin Haggerty is a full-time professional trader who was head of trading for Fidelity Capital Markets for seven years. Would you like Kevin to alert you of opportunities in stocks, the SPYs, QQQQs (and more) for the next day's trading? Click here for a free one-week trial to Kevin Haggerty's Professional Trading Service or call 888-484-8220 ext. 1.

In the previous commentary (7/23), the negative sequence of the declining $US Dollar to possible new lows (1969-2007), rising oil prices and increased demand for gold was outlined, and how it is a significant negative for the current bull market cycle. I also mentioned that the LBO market is rolling over, with significant increased credit risk, and that means credit spreads will widen, which will curtail many of these over-leveraged "funny money" deals that have become as much of a bubble as the dot-com madness in the last bull cycle. The subprime markdown of mortgage operations will mean significant losses for many institutions going forward. It was also mentioned how key brokerage stocks were trading below their 200-day emas, and that the SPX reversed 6 closes to 1534.10 on Friday, so we could expect more weakness. The $US Dollar hit another new low yesterday, at 80.02 and closed at 80.13. The TLT is back to that head and shoulder neckline, closing at 86.14, up from the 81.88 low versus the original 81.40 price objective. Crude oil ($WTIC) was -1.8% to 73.56 and off the recent 76.39 high.

The market action yesterday was similar to the 3/13/07 decline, when the SPX was -2.0%, NYSE volume was 1.96 billion shares, volume ratio was 5, and breadth -2186. The $XBD that day was -4.4%, $BKX -3.3%, OIH -1.9% and XLE -1.3%. Yesterday, the SPX was -2.0% on NYSE volume of 1.98 billion shares, volume ratio 7 and breadth -2650, with 3003 declines and just 353 advances. The OIH was -2.1% and XLE -2.9%. The most significant factor about yesterday's decline was the financials, as the $BKX, MER, BSC, and LEH all took out their 3/14 lows, confirming a primary downtrend. GS and MS are also now trading below their 200-day emas. The SPX is on life support, with the financials in a confirmed downtrend. The reactionary earnings moves on recent "better than expected" (sharply reduced) earnings estimates won't overcome a continued downtrend in the financials. SPX earnings estimates had been significantly reduced to +4.2% for Q2, so it doesn't take much for "better than expected" reactions. Most of the economic numbers we are getting from the Bureau of Labor Statistics are so bogus, that even the "spin city bulls" have trouble reconciling, as do some former regional Fed Reserve presidents.

In the 7/23 commentary, I said that if expected weakness played out, it would set up a month-end bounce from lower levels. The SPX hit 1508.62 yesterday before closing at 1511.04, and month-end is Tuesday, so we are in that zone. The internals approached the short-term oversold zone with the 4 MA of the volume ratio 34 and breadth -918, with the 5-RSI at 29.76. I prefer to see the volume ratio < 33 and 5-RSI <20, but it is close enough seeing that there is a month-end bias to the upside. With the financials where they are, the SPX will not be taken to new highs in the next 5 days, and the odds of a significant month-end bounce are no better than 50-50. "They" are trying to get it going, with the SPX futures +6.5 points in Globex at 8:30 AM as I complete this commentary.

Check out Kevin's strategies and more in the 1st Hour Reversals Module, Sequence Trading Module, Trading With The Generals 2004 and the 1-2-3 Trading Module.

Have a good trading day,
Kevin Haggerty