After leading up to a sell-off the markets have now started to clear out the dead wood. Concern about the pace of economic recovery has been building, so this sell-off should not be considered out-of-place. The real test going forward will be the reaction to prices as they approach the 200 day EMA. A strong break through that technical area would be a major trading event, and confirmation of a stronger move lower. However, as I'll show throughout the week, the Beige Book does not show an economic catastrophe in the making, but instead an economy simply slowing. I think the more likely action is prices holding at the 200 day EMA to "catch their breath," as it were. However, for those who took my advice and shorted last week, place your stops so there is still a profit if triggered.
Let's take a look at the charts:
I've included this long-term chart to illustrate that key Fibonacci levels are below the 200 day EMA.
The overall market picture has been decidedly negative for the last few weeks. Prices are in a clear downtrend, and all the EMAs are moving lower. Also note the shorter EMAs are below all the EMAs, prices are below the EMAs and prices are using the EMAs as technical resistance. All of these factors are negative for the market. However, notice the uptick in overall volume as prices hit the 200 day EMA. This could be an indication of a selling climax for this sell-off, as prices now use the 200 day EMA for technical support.
All of the technical indicators are negative: the A/D and CMF indicate that money is leaving the market and the MACD shows momentum is declining.
While IWMS are also at the 200 day EMA,
The QQQQs have moved through the 200 day EMA.
The IWMS and QQQs are both down ~ 9.5% from their peaks, while the SPYs are down ~ 7.25%, meaning the sell-offs are still in standard correction territory. This week, the most important developments will occur regarding the 200 day EMAs. The QQQs have already moved through this key technical area, while the IWMs and SPYs are holding their ground. If we see the IWMs and SPYs break this important level, the sell-off could get much worse.
