Taking On Water

Uh-oh.

Stocks took a plunge Wednesday on increased volume, and the NASDAQ notched its ninth distribution day in seven weeks.

Oddly enough, price has held up remarkably well (the NASDAQ is actually up 2.8% since the first sell day). However, it's only a matter of time before the Composite will no longer be able to drive away from a selloff like this under its own power.

A gap up to a new 6-year high, that then reverses into an outside engulfing candle deserves extreme caution. It's the kind of formation that can quickly gain further downside momentum, especially given the weak technical indicators.

However, it's worth noting that the selling on Wednesday had that strange lack of intensity again, especially on the NASDAQ. A look at the hourly chart shows that two-thirds of the price tumble occurred in the final hour of trading, while volume accelerated just 4%. On the NDX, volume actually fell 4%. Big tech names such as AAPL, AMZN, DELL, GOOG, INTC and many others all slipped on lower trade Wednesday.

What does this mean? Hard to say, but leading stocks also held up surprisingly well. The IBD100 slid in-line at 1.6% (the RUT fell 1.4%), while 20 stocks hit record highs. Like the broader market, there was a noticeable lack of selling. In fact, just 17 stocks on the IBD100 printed distribution days. It was such a low number that I cross-checked both the NDX (26 distribution days) and the OEX (24 distribution days). These aren't the totals of broad institutional dumping.

But the selling profile of a market can change quickly. Selloffs have a time-honored history of starting slowly, then gaining speed. Even though the NASDAQ has closed the gap and remains above its 13-day, this is not a market to keep on a long leash. The technical indicators are all sobering reminders of downside risk.







For many weeks, the blue chips have been fairing worse than the NASDAQ, and this pattern continued on Wednesday. The troubling thing about the SPX -- besides a MACD from hell -- is that ever since March, any time the SPX sold off, it rallied to a higher high (green arrows). Unfortunately, this pattern failed on Wednesday for the first time in fourteen weeks (red arrow). Double top?







There was a lot of chatter on Wednesday about bond yields driving the equity weakness. However, the market itself shows a dubious relationship at best. As the market started selling off, yields actually fell, and the 10-year printed a weak, inside day. The Financials took a big hit, but a more likely culprit for this wasn't Treasuries. It was sympathy pains for the demise of the two BSC mortgage-based hedge funds.







Option volatility continues its triple-Venti jitters. Wednesday marked the 12th straight session that the VIX has seen wide intraday price swings, almost all greater than 10%. While the SPX fell 1.4%, the VIX leaped 14%!








Speaking of options, the TOF Ratio is poised ominously above its second negative crossover in three weeks. It's very rare that the market does well when the 21-day can't stay above the 50-day. The last time this crossover pattern occurred, the Feb 27 selloff happened just 9 sessions later.








Finally, the blogger world has seen a strange cluster of negative coincidences this past week, made even more odd given today's selloff (woooooo....) In a bizarre, geeky twist on the Sports Illustrated cover jinx, 24/7 Wall St. published their 25 Best Financial Blogs on Sunday, only to see 5 excellent blogs from their list -- plus one other -- experience "developments" this week:

The chronically ursine Ticker Sense Blogger Poll printed its highest level of bullish sentiment ever! (contrarian bearish?), Yasar Anwar announced a "Permanent Shutdown", Jim Kingsland announced an indefinite summer hiatus, The Kirk Report had a surprise shut down for an unexpected server move, Dr. Brett disappeared, only to turn up hospitalized with acute appendicitis (get well, Dr. Brett!), and finally the non-24/7 Trader-X bids "Goodbye, Farewell, Amen".

Anyone else have something to announce? Sheesh. :)

Once again, the bears are in the perfect position to cue the fat lady and bring this baby home. All it takes is follow-through.

Until tomorrow, have a great evening.

best

dk