Redrawing the Map

Reality is that which, when you stop believing in it, doesn't go away.
-- Philip K. Dick

After a three-day break, market players aren't feeling any great anxiety to buy this morning. Early indications are for a continuation of Friday's ugly action. Although volume was light on Friday, breadth was extremely poor and it was a bit surprising that action prior to a holiday was so weak.

We're now doing some severe technical damage to the indices for the first time since the bounce started back in March. We had brief pauses along the way to the highs in June, but we never really did any damage to the uptrend line. This pullback has now breached the 50-day simple moving average and is in danger of taking out the 200-day simple moving average. In addition, we have a head-and-shoulders top that even the non-technicians can easily see in the charts.

The big technical picture obviously warrants some major caution at this point. We haven't completely broken the trend off the March low, but we seem to be in the process of doing so, and there's little reason to believe the damage will be quickly repaired. We went up very far, very fast, and moves like that need to be digested, especially when the economic concerns are still so dire.

Wall Street was a bit more optimistic than Main Street, and now expectations are being adjusted. Vice President Biden admitted this weekend that there was a misreading of just how bad the economy was, and that it was overly optimistic to assume unemployment would top out at 8%. The employment numbers on Friday made it clear that the $787 billion stimulus package isn't helping as it was supposed to.

Chances are growing that the Obama administration will attempt to sell another stimulus package, but with concerns growing about the huge increase in the deficit that we already have and its potential inflationary pressures, Wall Street may be skittish about the idea of even more spending.

I've recently written a little about the disconnect between Wall Street and Main Street, and after visiting this weekend with relatives from Michigan, Florida and Virginia, I heard little that makes me believe we have any substantial economic improvement coming in the near term. Wall Street has been pricing in some better times, but the anecdotal evidence I've been encountering is not very optimistic.

It looks like the process of closing the gap between Wall Street and Main Street is under way. My main hope is that Main Street helps out by becoming more positive and that it isn't just Wall Street that corrects. There isn't much we can do about Main Street, so we'll worry about Wall Street ... and it's looking pretty shaky right now.

Buckle on the trading helmet and tighten up your seat belt. It's going to be a bumpy ride.

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Know what you own: Volume leaders from Friday include Eldorado Gold (EGO - commentary - Trade Now), Alcatel-Lucent (ALU - commentary - Trade Now), SPDR Trust (SPY - commentary - Trade Now), PowerShares QQQ Trust (QQQQ - commentary - Trade Now), Bank of America (BAC - commentary - Trade Now), Citigroup (C - commentary - Trade Now) and Imperial Oil (IMO - commentary - Trade Now).

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James "Rev Shark" DePorre is the author of Invest Like a Shark: How a Deaf Guy with No Job and Limited Capital made a Fortune Investing in the Stock Market. He is founder and CEO of Shark Asset Management, an investment management firm, and he also operates sharkinvesting.com, an interactive online community that serves and educates active investors. DePorre holds business and law degrees from the University of Michigan, is a member of the Michigan Bar Association and a former tax attorney and CPA. He lives in Anna Maria Island, Fla., with his wife and two children. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Rev Shark appreciates your feedback; click here.