Technical Damage

In my mind yesterday’s session marked a milestone that may perhaps one day be remembered as the very moment when the dynamics feeding a now five year monetary experiment suddenly shifted. I’m not saying that we necessarily painted a long term top – what I would however like to point out is the plain obvious: We experienced a sudden drop in equities on the same day the ECB decided to cut interest rates from 0.50 to 0.25 bps. The underlying implications of this one event may not become fully apparent to many market participants until much later. As the saying goes – tops take time to form and assuming we receive technical confirmation there will be plenty of opportunities to jump in.

But even if this was an early harbinger of a more profound correction on the horizon I am certain that institutional traders will do their best to lighten their load while equities are still trading near record highs. For instance Bernanke and Friends will have plenty of opportunities to talk the market up today:

And as you can see we’ll also get the freshly fudged NFP data in a few minutes – this ought to be good for a few short term swings. Not that anyone really cares about the economy anymore these days – it’s all about the printing. Or perhaps – suddenly is it not anymore? 😉

On a more practical level – here’s the E-Mini which has held its ground overnight but is far from being out of trouble. The 25-hour above is now accompanied by two NLBLs which – given the current gyrations – will be difficult to overcome. One would have to see a surprise spike higher that cuts through all that. Very difficult to predict and even if we get it and today turns into a short squeeze it would not erase the technical damage that was inflicted yesterday. The odds for a medium term correction have now increased significantly.

FYI – if we drop through yesterday’s lows today then I expect acceleration lower. If you are short then put your stop above those two NLBLs (roughly above ES 1752). Entries here are difficult, especially until about 8:45am EDT. Once we get there I may chime in again with an updated chart.

UPDATE 8:45am EST: The NFP report is in and resulted in a quick drop lower. Once again the instinctive response was to the downside:

Here’s the NQ on which I see two opposing inflection points: The hourly has the 25-hour SMA plus a NLBL at 3332.25 and that one will be with us for four more hours. The daily shows us a stab lower just now which bounced at the 25-day SMA. I must however concede that this one hasn’t been observed recently and I’m actually surprised that it did just now – perhaps coincidence and we get to see what we want to see.

Bottom line: Until we see a breach above the 25-hour on the NQ, the ES, or the YM the bulls remain in trouble.

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Cheers,