Market Breaking Down

The evolution of a market going south is what I want to discuss initially here. For quite some time, most of the economic reports that came our way we're quite positive. This held sway until roughly March. There were some mixed numbers just prior to that, but overall, the reports were more favorable. When we received numbers from the ISM Manufacturing Reports, they were heading north from 50.0 readings, which is the dividing line between growth and contraction. They made their way up to the 54-level over several months. The 54-level is nothing to get excited about, but it was clearly headed in the right direction, which is all the stock market naturally cared about.

We then started to get into the earnings season, with some deterioration already occurring in those economic reports. We waited to hear from Cisco Systems, Inc. (CSCO) as they're involved in just about every facet of technology. CEO Chambers said the future didn't look very bright, which caught the market off guard. He stated that the economy seemed to fall off a cliff in March out of nowhere. Thus, he significantly lowered guidance, which crushed the stock, and started the stock market on its intense decline. CEO after CEO came out shortly, thereafter, and confirmed Mr. Chamber's notion that things had indeed fallen off a cliff quite suddenly. To confirm all of the CEO's, we then saw the economic reports start to weaken quite rapidly. Nothing positive any more as jobless claims began to rise.

Job creation started to fall faster than expected. The ISM Manufacturing Report showed some weakness, not to mention all of the bad reports from the Empire State Index, the Philadelphia Fed numbers, and the Chicago PMI. All of them show recession-type, or near recession-type, levels in manufacturing and economic growth. With Friday's terrible Jobs Report, and still further weakening ISM Manufacturing Report, we see the market has said enough is enough. The market simply broke down below key S&P 500 support at 1292. No strong rally attempts. Just pretty much a gap-down-and-run day. The market has spoken. Folks need to be listening.

The bad news for Friday began last night when China reported its critically important economic news on manufacturing. The number was supposed to be well over the contraction level of 50.0. Growth was expected. Things were supposed to be getting better. Then reality hit with a reading of 50.2. Just about in recession. That caught everyone by surprise, thus, this was the first catalyst to kill our stock futures.

Then more bad news came in from Europe, which is normal these days. Futures plunge part two. Part three, or the icing on the cake, came from our Jobs Report, which showed a much lower level of creation than expected. We opened down one-hundred points on the Dow, and it never recovered. You can slap this stock market hard and often. It is very resilient. It has taken some very nasty blow yet three times held that key S&P 500 level of 1292.

But not this time as we opened right on this number, and held it for the first fifteen minutes, or so, and then it gave way for good for the remainder of the day. Ugly action all day as the buyers never stepped in. As the day ended, the breakdown was official, and needs to be respected. This was a great day for the bears. The bulls want to run and hide for now. The bears have completely taken over. Sure, bounces from oversold will occur, but make no mistake about it, the bears are in complete control.

The carnage was found everywhere you looked today. There was no hiding as everyone was running for bond shelter. Give me 1%. Who cares! Just get me out of the way of this stock market. Folks simply wanted out of everything, transports, financials, technology, home builders, internet, gaming, technology, and so on. Dow stocks didn't get their usual hide-out run. Who cares if you give a dividend and have a low P/E. You're getting smoked as well.

Nothing held up in this sickly environment for stocks. Just hit the sell button and we'll talk later on. Volume was very decent as well. Stocks, like Facebook, Inc. (FB), continued their carnage with no let-up in sight. It was a nowhere-to-hide market, as stocks that were slaughtered and seemed unable to fall further, fell further as they broke down out of bear flag patterns, the moves down rapid and powerful with volume. Everything from Apple Inc. (AAPL) to Priceline.com (PCLN) fell hard. Stocks, like Wynn Resorts Ltd. (WYNN), continue their nose dive as does just about every single stock related to the commodity and financial sectors.

The market bled hard while there were no bandages to be found. The negative here is how many stocks are breaking key 200-day exponential moving average support on big volume with large gaps. The gap downs, and volume, will make those numerous gaps just above, very tough to get back through. Things are very negative technically, now, which clearly confirms the bad news fundamentally. The technical damage will need to be reversed soon, if the bulls are to have any chance in the short-term.

The weekly and monthly charts have flashed negative divergences on their last highs across the board. Whether you're looking at the Nasdaq 100, Dow, S&P 500, small-caps, mid-caps, or the Wilshire 5000 Composite Index (WLSH), or whether you're looking at transports or financials, it doesn't matter, they’re all the same. If you look at individual stocks, the story is the same there as well. Leaders, such as Caterpillar Inc. (CAT), Mastercard Incorporated (MA), and literally thousands of others, have weekly and monthly negative divergences. In time, we know they have to unwind, but they can be delayed quite a ways out.

However, due to the poor economic news we're now hearing about, and those poor earnings reports we have heard recently, that process has begun now. No way of knowing at this moment in time how bad things will get. That tale will be written over time. For now, we watch 1250, which is the next clear level of support, while 1292 up to 1314 is strong and powerful resistance. If we lose 1250, we have 1200 next up in time. Be careful and keep things very light for now.