Market Poised on Edge of Cliff so Watch Closely

May 25, 2010: 10:00 AM CST

Today is the day – the market officially tested the February 2010 lows in the Dow Jones and S&P 500, a very likely downside target that has been fulfilled.

The question is – will the market hold these levels or continue on through them?  Whatever happens at these levels will set targets for the near future, so watch closely.

S&P 500:

The key level on the S&P 500 was 1,050, but officially 1,044 which was the February 2010 spike (intraday) low.

The market touched this level then rallied sharply off of it in the morning, but if the afternoon sees us break through the level and close under 1,040, it would likely be a game-changer.

Dow Jones:

The level to watch on the Dow Jones is 9,835, or 9,800 for a ’round number’ reference level.

Like the S&P 500, the Dow broke through the level slightly then recovered as bulls tried their hardest to support the market at this key level.

A close under 9,800 today could well be a game-changer for the market.

In terms of trend structure, both the S&P 500 and Dow Jones have…

1.  Broken under the rising 20 and 50 day EMAs
2.  The 20 and 50 EMAs have crossed in a “Death Cross”
3.  Price has broken under the key rising 200 day SMA

And if price closes under these key levels – the February low – we would have an official classification of a downtrend by all objective measures.

Using the Martin Pring standard of measuring the “Weight of the Evidence,” a close under the February lows places a 10 ton weight on the bearish case.

Price would have formed a lower high (mid-May) then lower low (under February low).  A downtrend is classified as a series of lower highs and lower lows.

Watch closely.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

9 Comments

9 Responses to “Market Poised on Edge of Cliff so Watch Closely”

  1. World Finacial Stocks Are Leading The Stock Market Down « EconomicReview Journal Says:

    […] Corey Rosenbloom writes Stocks Poised On Edge Of Cliff […]

  2. sonofabear Says:

    fantastic work.. thx

  3. So... Why Exactly is Technical Analysis Important? | Afraid to Trade.com Blog Says:

    […] everyone can see that 1,050 is a very important prior support level.  I called it the “Edge of the Cliff” in this morning’s update, and so far that has been […]

  4. TheYenGuy Says:

    Corey, in late day trading, stocks pulled back from that brink: $SPX closed at 1074 back from the brink at 1044; $INDU closed at 10043 back from the brink at 9835.

    World Financial Stocks, IXG, are leading the stock markets lower. The Yahoo Finance Chart of XLFS, EUFN, IYF, IXG shows the precipitous decline in world financial stocks.

    The financially sensitive stocks, that is the Russell, 2000, IWM, and the small cap value stocks, RZV, started to fall sharply today, but recovered; IWM closed at 64.19.

    Carry trade investment is coming out of growth markets, such as metal manufacturing, XME, steel, SLX, energy service, OIH, and Brazil, EWZ, Mexico, EWM, Australia, EWA, Asia, DNH, and emerging Europe, GUR.

    The unwinding of yen carry trade investments is particularly well seen in the Stockcharts.com chart of FXA:FXY and FXE:FXY.

    China shares, FXI, are off sharply on inflation concerns, the abrupt turning off of bank credit in early April, and now fears of war in the Korean peninsula.

    European Shares, FEZ, actually fell off the edge their cliff, but then clawed back up, as Carrick Mollenkamp, Randall Smith and David Enrich of the Wall Street Journal report that European banks are being forced to pay more for short-term dollar borrowings than banks in the U.S. and Asia—suggesting that lenders world-wide are increasingly nervous about the risks ahead for European banks as financial pain cascades across the continent.

    While US Treasuries, IEF, TLT, ZROZ, are up, they are not a safe haven investment as thier chart patterns shows considerable topping out characteristics with lollipop hanging man candlesticks and dark cloud cover candlesticks. Today’s double bottom in the 300% bear government bond ETF, TMV, to close at 46 suggests a gradual, that is small, buying opportunity for institutional buyers.

    The gold ETF, GLD, closed up slightly to close at 117; MSN Finance chart shows it has risen 4% in the last month.

    Day traders took the gold mining stocks, GDX, up to resistance at 49.

    The candlestick in the US Dollar ETF, UUP, may turn out to be an evening star, suggesting that the US Dollar has topped out. The US Dollar, $USD, closed at 86.62 in a weak harami.

    Mike Mish Shedlock in article Corporate Bonds Smacked provides a chart of high yield corporate debt, that is the junk bonds, traded by JNK, and questions if we are seeing a liquidity crisis or entering a solvency crisis.

    A collection of ProShares Bear Market ETFs In A Finviz Portfolio, SRS, SJH, SSG, EEV, SMN, SMK, BZQ, SIJ, EPV, FXP, SCO, JPX, BOM shows an averge gain of 30% since April 24, 2010. The Yahoo Interactive Finance Chart shows SCO to be a market leader, reflecting a tremendous unwinding of yen carry trade investing.

    Today marked a good day to build a postion to or add to a position in HGD.TO, which is the Horizon’s 200% bear of the gold mining shares, as it fell lower — in a bull market one buys on dips; a bull market has commenced in this bear market investment.

    Ambrose Evans-Pritchard writes today: “The global credit system is flashing the most serious warning signals in almost a year on triple fears of a Spanish banking crisis, escalating political risk in Asia, and a second leg to the US housing slump.” In such an evironment I favor personal investment in and possession of gold coins.

  5. The 1100 Level on the SP500 May 27 | Afraid to Trade.com Blog Says:

    […] course, as I mentioned earlier, any solid break under 1,040 officially reverses the trend from up to down… definitionally […]

  6. satish Says:

    >>from one expected level to next<<
    “indeed”. this sounds like some sort of shifted martingale pricing formula.

    looking at things from a risk neutral world (ie the world that is not afraid to trade) that is how it should work..

    ?
    🙂

    makes sense?

  7. The Great Wall of Resistance at SPX 1110 | Afraid to Trade.com Blog Says:

    […] we’re in now… and any move under 1,070 likely sends us to 1,040, which is the “Edge of the Cliff” for the […]

  8. Key Edge of Cliff Level to Watch in Russell 2000 June 6 | Afraid to Trade.com Blog Says:

    […] Key Edge of Cliff Level to Watch in Russell 2000 June 6 Jun 7, 2010: 12:00 PM CST As we start a new trading week, we see that the Russell 2000 Index, an index of small-cap stocks, balances on the edge of a chart cliff at the current level similar to the S&P 500’s 1,040 level. […]

  9. Third Time’s a Charm? SPX Tests Line in Sand | Afraid to Trade.com Blog Says:

    […] S&P 500 Poised on the “Edge of a Cliff” […]