Market Commentary – August 4th, 2011

A Few Thoughts After the Close:

The overall market sold off extremely sharply today.  The Dow Jones Industrial Average was lower by 512 points closing at 11,383.58 and in the process went negative on the year.  The Dow is now down 1.74% on the year, while the S&P 500 ‘SPX’ and the NASDAQ 100 ‘NDX’ are down 4.6% and 0.83% respectively for the year.

The weakest sectors/indices on the day were the Biotech ‘BTK’,  Oil Services ‘OSX’, High Tech,  Commodities ‘CRX’, Oil & Gas ‘XOI’, and the Financials.  Nothing went higher on the day except bonds.  Oil was lower by $5.30 to $86.63 per barrel, a 6 month low; and Gold was lower by $7.40 to $1,657.50 per ounce.

There has been a lot of chatter about what has been the cause of this sell off.  I’ve heard people talking about the European Debt Crisis and slowing growth here in the United States.  My thoughts are that both of those items are factors in the current market selloff;  however I would like to add a third factor to the equation.  I think the negative, anti-growth Keynesian economic policies being pushed by the Democrats in Washington are starting to have an effect.  I see the sharp selloff in the price of oil as an indication by the market that it is expecting the economy to decline from its current levels.  If that is the case,  then we will have a true double-dip recession situation where I expect the 2nd recession to be much worse than the 1st one due to the already weakened state of the U.S. economy.

I am probably going to sit tomorrow out from a trading perspective.  However I will be back in the morning before the open with my look at the various sector indices I track.

A Few Thoughts Before the Open:

In reviewing the charts from yesterday’s trading activity of the various indices I follow I noticed the following:

  1. The NASDAQ 100 ‘NDX’ reached an intra-day low of 2,254.91, before closing at 2,312.78, basically bouncing off its 200 day moving average in the process.
    With yesterday’s close at 1,260.34 the S&P 500 ‘SPX’ is only up 0.20% on the year.
  2. The S&P Chemicals Index ‘CEX’ with a close of 313.54 basically closed on its 200 day moving average.
  3. Despite yesterday’s late rally,  the Amex Oil & Gas Index ‘XOI’ closed lower yesterday at 1,235,44 and below its 200-day moving average.  It looks like the ‘XOI’ has broken down.  I am expecting it to continue to move lower. I see support coming in at 1,228.18.  If the ‘XOI’ closes below that level, then I expect it to continue to move lower and test 1,141.92 on a closing basis.

In looking at the charts on the individual stocks I noticed the following:

  • I did not see any heavy volume stocks in the new high list.  This is definitely unusual.
  • The pre-market futures are sharply lower.  A good number of the charts I have looked at this morning have clearly broken below support.  However there are still a fair number that have not broken support;  but another day sharply lower could cause a good number of these stocks to break support.  If this happens I see this very bearish for the overall market, and signaling significant further declines.

I see the downward pressure on the market as primarily being the result of the debt-ceiling and Federal Deficit issues, and the way liberals are hell bent to raise taxes at all costs.  I think what we are seeing is a preview of their campaign rhetoric; and I am afraid that they will take to levels not seen since the 1st quarter of 2009. Additionally, as the new regulations from Obamacare and Dodd-Frank begin to take an effect their negative impact upon the economy is beginning to be realized.  If I am correct,  then unfortunately the market is going to be under pressure until late 2012.  OUCH !

Again, for today I am looking for stocks with negative chart patterns, and are not over extended.  I am looking to write a covered-put position where the breakeven point is above the resistance point and our subsequent would be stop loss position if we were doing a straight equity trade.

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