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Market Selloff: the Beginning or the End?

Nov 14, 2012
Chad Karnes, CMT

The S&P has fallen 8% from its September price highs and many support zones have failed. Right now the trend remains down and bulls have to really reach for anything positive.

8 out of the last 25 days the Dow has been down over 100 points, and Wednesday, 11/7’s, post election 313 point decline in the Dow (NYSEARCA:DIA) was the largest all year. 

Are these large declines indicative that a major trend change is occurring?

Fundamental Warning Signs

On 10/9 with the S&P 500 (NYSEARCA:SPY) @ 1450 and before the likes of Apple (NASDAQGS:AAPL), Intel (NASDAQGS:INTC), and McDonald's (NYSE:MCD) all reporting worse than expected earnings we published an article on the cyclicality of earnings and margins and why investors should be cautious of the market’s lofty levels.

The chart below accompanied that report and helps explain why investors have good reason to be cautious with the lofty 4Q earnings expectations and the expectations through 2013.

To summarize: earnings are cyclical, do not go up forever, and invite competition when margins get too high.

On Top of It Technically

In our Newsletter published 9/21, we identified the importance of 1430 and why if it fails a top is likely in.  “We will be waiting for prices to drop back below the Fed low of 1430 (^GSPC:SNP) to give us a signal that the top is likely in”. 

In the 10/19 ETF Profit Strategy Newsletter we reiterated, “We are waiting for prices to maintain below the Fed Support Zone @ 1430 to give us a signal an intermediate top is likely in”. 

In our 10/1 Technical Forecast , we warned that 1420 and 1400 were the next major supports that needed to hold.

“A break below 1430 (and thus the uptrend line) and I turn more bearish.  This still holds true today.  1420 (the ECB announcement resistance price) would be the next support after that.  1400 is a must hold for longer term investors”.   We also attached the following chart along with other commentary.

On Tuesday, 10/23, prices breached the 1420 level.  The 1400 price support failed on 11/7.

The S&P now sits below 1360 and its 200 day Moving Average.  There is one major support price left I am watching.  If it fails then dip buyers should start to really have 2nd thoughts (if they aren’t already).

 What we are Watching Now

Seasonally the markets are entering their strongest period of the year.  November and December typically spark the "Santa Clause Rally", but tax and dividend (NYSEARCA:VIG) stock sellers are putting this historical trend in jeopardy. (article here).

For S&P, 1430, 1420, and now 1400 have all failed which means technically there is very little price support left. 

The latest ETF Profit Strategy Newsletter includes a detailed analysis of various market forecasting tools.  The market is down 8% from its September high price and although the bulls have seasonality and statistics on their side, there are major warning signs that this decline could turn into a longer term trend change of selling.

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