A Waterfall Decline Looks Imminent

Okay, we're back.  Our web host has been playing games with us all week and shut us down for nearly 18 hours!  We finally were forced to upgrade our service package due to too much traffic.  Those problems are behind us now, so let's move on.

We are two days into the week and alot has happened.  As we discussed, Fannie Mae and Freddie Mac are basically worth 0 now due to the government takeover and as a result the market catapulted higher on Monday's open.  Now, as a day trader, I found the intra-day action on Monday quite interested and telling at the same time.  The Dow Jones had run up nearly 340 points or so before pulling back.  The action intra-day was ugly and the techs were leading it.  At one point the Dow had given back almost 240 points and the Nasdaq actually made a 66 point reversal before moving higher into the close.  This was our first warning that the move was most likely a false breakout.  There was obvious selling into that burst higher.

In our post on Sunday, we said:

"Now, if this market puts in an ugly reversal tomorrow, we are basically looking at the potential for a waterfall decline"

We saw a glimpse of a reversal on Monday; however, today's action put a nail in the coffin.  The Nasdaq is leading the way, closing at its lowest levels since the July 15 bottom. The Dow Jones put in a horrible looking dark cloud cover candlestick formation which was nearly a bearing engulfing setup.  The S&P 500 broke below Fridays close, negating the entire rally from Monday and is getting close to taking out the lows from Friday as well.  Finally, and more importantly, the NYSE is challenging the lows from last Friday and close to setting multi year lows again.  7400 is now the focal point for support on this index.  This is most likely where we are heading.  This is the 50% retracement level of the entire run from the March 2003 bottom into the October 2007 top. 

Needless to say, the market is in dangerous waters.  I mentioned over the last few weeks that the market was coming into a seasonally bearish time period of the year.  The next 3 weeks will be extremely dangerous and I believe we will see a waterfall decline that will flush this market out for good.  The key to the severity of this decline will be visible in the way that the S&P 500 tests the July lows near 1200.  If we get a waterfall decline, the market will most likely blow through our targets at 1182 to 1165, intraday or for a couple sessions before recovering.  But when this happens, we will be ready to buy up in the face of fear.  This is when the real money is made.  It will allow us to position ourselves for the next year or so.

Trade Safely and Protect Your capital over the next few weeks.  Keep the powder dry and be ready to pull the trigger when we are in the face of capitulation, if we get it.