Sterling Market Commentary for September 29th, 2011

A Look at Wednesday’s Market:  The overall market moved sharply lower on Wednesday in a broad based move, with the Dow Jones Industrials lower by approximately 180 points, that saw every index I track move lower on the day.  The weakest sectors were the Oil Services, Gold/Silver, Chemicals, Natural Gas, Banking, Cyclicals, Broker/Dealers, Biotech,  High Tech, Oil & Gas, and Transports.  Among the Dow Jones Industrials the weakest components were Bank of America ‘BAC’, Alcoa ‘AA’,  3M ‘MMM’, JP Morgan, and Caterpillar ‘CAT’ with each posting more than a 3% loss on the day.  Oil was sharply lower, down $3.24 to $81.21 per barrel.  Gold was lower by $34.50 to $1,616.10 per ounce.  Wheat was lower by 0.194 to $6.386 per bushel, and Corn was lower by $0.214 to $6.306 per bushel, while Soybeans were lower by $0.394 to $12.234 per bushel.

A Few Thoughts Before the Open: In looking at the charts from yesterday’s trading activity I have the following thoughts on this morning’s market.

1.  I think the across the board selloff in commodities is potentially signalling a decline in the economy.  If we see a continued decline in commodity prices then I think there is substantial increase in the probability that the U.S. economy will enter a recession within the next 6 months.

2.  Having completed my look at the individual stocks I did not see any stock setting a new yearly high with an attractive chart pattern; and the stocks with the heaviest volume all had bearish chart patterns.  Not a good sign if you are looking for a market rally.

3.  In looking at the charts of the various indices, I noticed that the chart of the Dow Jones Transportation Average was far more bearish than that of the Dow Jones Industrial Average.  Under Dow Theory, a pull back in the Dow Jones Transportation Average in conjunction with a pullback in the Dow Jones Industrial Average confirms the start of a bear market.

4.  Most of the sector indices I looked at where very negative in their chart patterns.

5.  I noticed that on August 15th,  August 31st,  and September 16th the Dow Jones Industrial Average set short term highs that were followed by moves downward.  If the pattern holds,  then the 1st days of October will see another short term high in the market.

The Bottom Line:  Despite positive early pre-market futures, I am not expecting any rally to hold its ground. I continue to maintain that the market is in a sideways trading pattern with a downward bias.  In my trading I am looking at short positions I can sell puts against.