This column was originally published on RealMoney on Sept. 7 at 9:04 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
"Character cannot be developed in ease and quiet. Only through experiences of trial and suffering can the soul be strengthened, vision cleared, ambition inspired and success achieved."
-- Helen Keller
Yesterday the market underwent a change in character. Although it was just one day and it is possible that the indices will regain their footing and continue on their recent upward trek, there was some worrisome action that indicates something fundamental might be changing.
Three things about the action yesterday should cause us to quickly become more defensive. First was the very poor breadth. There were around 3.5 declining stocks for every one that advanced. That indicates market players weren't just rotating out of one group and into another, but were looking to raise cash. Although volume wasn't that heavy, it did increase slightly and the breadth is a sign the selling was fairly intense.
The second area of concern was the lack of dip buying. The bulls behind the recent rally decided for some reason that yesterday was not a good day to take advantage of lower prices. There were a few mild bounces once we started to downtrend after the open, but they didn't last long and we ended up closing near the lows of the day. Clearly the bulls felt less confident about buying weakness.
The third problem is the technical setup. The recent low-volume rally created what is known as a "bearish wedge" pattern in the major indices. This is simply an uptrend on light volume with no consolidation along the way. It is vulnerable to sharp selloffs because the market players who are accumulating gains along the way are likely to sell quickly and aggressively to lock in profits once things start to slip. This selling has a tendency to gain momentum and feed on itself because no one wants to see their recent gains suddenly turn into losses.
The breakdown yesterday out of the bearish wedge is likely to attract some technical selling, and has a fairly high likelihood of further downside. Unfortunately, when the market undergoes a low-volume rally like we did at the end of August there isn't much technical support and that means that once we crack, the fall can be quite hard.
We have some carryover of yesterday's weak action to this morning's open. Overseas markets were broadly lower and the news wires are slow. Be careful out there.
James "Rev Shark" De Porre is a self-taught trader who primarily trades for his own account from his home on Anna Maria Island, Fla. He is a member of the Michigan Bar Association and a former tax attorney and CPA. De Porre holds business and law degrees from the University of Michigan. He was formerly the host of America Online's The Shark Attack and presently operates SuperTraders.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Rev Shark appreciates your feedback;
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