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There's no two ways about it -- investors feel blindsided. But they shouldn't since the news taking the averages down have been building for some time. Stocks rode higher on a sea of Fed liquidity, bailouts, transfer payments and ultra-low interest rates. They became incredibly overbought and now they're not. Confidence in the integrity of markets is at a low point shocking even the most ardent and vocal bullish cheerleaders.

What lies ahead? Nobody knows. Certainly economic and earnings news have been helpful but then there's that "sell the news" deal combined with newly revealed debt concerns at home and abroad.

I'll leave it to others to expand on today's news since the tape is really all that matters and it stunk. It does seem like there's another shoe to drop and what that might be is beyond my ability to know.

Volume was heavy again as distribution continues with breadth data still sharply negative per the WSJ below:

 

The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE.  When readings are +60/-60 markets are extended short-term.   The market is now short-term oversold obviously.

The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends.  I believe readings of +1000/-1000 reveal markets as much extended. The markets are now undergoing the long awaited correction but are doing so in a rapid manner.

 

 

The VIX has risen suddenly to levels indicating great fear.  We haven't seen these levels since 2009. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge".  Our own interpretation is highlighted in the chart above.  The VIX measures the level of put option activity over a 30-day period.  Greater buying of put options (protection) causes the index to rise.

Continue to Major U.S. Markets

SPY after moving lower initially on the day found some buying to take it positive on the day if only briefly. But, this turned out to be wasted buying power as markets moved inexorably lower into the close.

SPY daily chart view shows a market rapidly cutting through the 50-day MA and now challenging the important 200 day MA. Failure to hold the latter would be very bearish.

SPY weekly chart shows a clear picture of where things might stand from an intermediate view. We've moved from significantly overbought to neutral levels. A test of the lower level support line might allow us a better than average correction. But, getting to $95 might be a good Fibo retracement.

MDY weekly chart is interesting since the sector has already dropped nearly 8% but the 22 period MA held. Further, the lower line represents an even better target in my opinion and is where the strongest support remains.

IWM weekly chart reflects heavy volume liquidation and clearly delineates levels of support. Remember "small caps" are the most economically sensitive of sectors and they may sense a slowdown or, gasp, a double-dip.

QQQQ weekly chart shows heavy volume sell-offs routinely. Tech was one of the more consistent leaders but this week's losses were significant enough to make the next level of support more realistic.

Continue to U.S. Market Sectors, Selected Stocks & Bonds

XLY weekly shows our little friend Chucky stayed above support and perhaps there were plenty of investors with below market buy limit orders conditioned to buy dips. God bless 'em!

XLB weekly charts should be viewed more ominously since a lack of growth in demand for materials means poor economic conditions ahead.

XLI weekly charts are similar to just about everything else in terms of the week's action. No demand for materials, no industrial product and so forth.

XLF weekly charts represent the banksters and a few others like AXP. Perhaps we're just setting up for a trading range going forward marked by the trading bands outlined in the chart.

XLV weekly charts reflect a market normally defensive but buffeted by a changing health care regime. Support around $29 seems clear enough for now.

IYR weekly is surprising since SPG group pulled its bid for GGP. That nugget of M&A activity really got the sector moving higher. Perhaps now with other troubles financing becomes a greater issue.

 

IYT weekly chart of transports shows pretty much the same action found elsewhere with the sharpest decline later in the week. But, it too is an important indicator of economic conditions.

 

IEF & TLT weekly charts reflect the flight to safety throughout the week but met with some profit-taking as even the most conservative investor understands forward supply considerations and low yields.

Continue to Currency & Commodity Markets

DXY/USD/UUP, FXE & FXY were all in play this week. Bucky was deemed a safe haven given troubles in Euro-land.  Meanwhile the yen was a favorite cross to play against the euro despite the lengthy Golden Week holiday in Japan. The euro touched key support around 125 and bounced marginally higher. It's much oversold and central bank intervention cannot be ruled out at any time.

GLD & DGP weekly charts show gold being considered more than just an inflation hedge but a true store of value. This is not a good sign for central bankers and a Bronx Cheer to them.

DBC weekly chart continues the trading range appearance. This look was just getting interesting with the possibility of a breakout but the rug was pulled out from under bulls.

USL weekly chart stretches crude oil futures contracts equally over 12 month period. Because the markets have been in contango (back month prices higher than front month) USL is doing better than the WTIC for example.

DBB weekly chart shows investors with a bearish mindset toward base metals like Copper, Aluminum and Zinc. 

DBA weekly chart represents the continuation of a trading range as grain prices remain stuck with poor fundamentals from high acreage planting reports and carryover inventories.

Continue to Overseas & Emerging Markets

EFA, IEV & EPV are similarly constructed with EFA including Asia while IEV is just Europe. EPV on the other hand allows investors to speculate on a declining European stock market. 

EEM weekly chart shows emerging markets bouncing nicely off support if that's any comfort for a nearly 10% down week.

EWU weekly chart shows most investors weren't thrilled with election results as a government still needs to be formed. Further the pound has been hit continuously.

EWA weekly chart just shows demand for base metals from China is likely to slacken negatively affecting the Aussie economy.

EPI weekly chart is harder to read and annotate given the bad data point which "should" be adjusted if the exchanges adhere to their edicts.

FXI & FXP weekly charts show a slight comeback for Chinese related securities. The question becomes, will China maintain the yuan peg which clearly they want to do? Further, will the Chinese tighten credit conditions further?

Continue to Concluding Remarks

No two ways about it, the markets were hit hard all week as debt concerns, financial reform and market glitches stymied investors. Markets were much overbought heading into this week. Not so any more.

Below is a recapitulation of trading from Thursday's debacle courtesy of Zero Hedge. (My apologies for the small size of the table.) You can see the players and their order size for SPY during the height of the so-called "glitch". Just remember with the major brokers (JPM, GS, Jeffries, UBS and so forth) "somebody" is on the other side buying. Who has the power to do make these trades?

The week is over and now markets are much oversold on a short-term basis. Unless there's another shoe to drop, and there may be, I expect a rally of sorts.

Have a great weekend.

Let's see what happens.  You can follow our pithy comments on twitter and become a fan of ETF Digest on facebook.

By Dave Fry, founder and publisher of ETF Digest and author of the best-selling book Create Your Own ETF Hedge Fund.

 

Disclaimer: Among other issues the ETF Digest maintains positions in: MDY, IWM, QQQQ, UUP, GLD, DGP, EVP and FXP.

 

The charts and comments are only the author's view of market activity and aren't recommendations to buy or sell any security.  Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period.  Chart annotations aren't predictive of any future market action rather they only demonstrate the author's opinion as to a range of possibilities going forward. More detailed information, including actionable alerts, are available to subscribers at www.etfdigest.com .

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