Market Update and the Anatomy of a Downtrend

The current daily chart of the SPY-As I mentioned earlier, the Specialists will open the stocks at what they believe to be the low of the day, they buy them there, ride them up and then sell into the rally, making up for the loss on an inventory gap like this one. There's a chance of an oversold condition today with volume rising, so we could see an oversold bounce so long as world events don't trigger another panic sell-off.

Here's the Q's during the 2000 tech melt down. In red, a nasty break down, but note the recovery. This is why tops are so volatile. The downtrend after that had it's bounces, but it was much less volatile. This is why I say the first 10% or so of the move down from the top is the most dangerous-I'd rather catch the meat of the trend in the middle which has much less risk. This is also why I do not advise going in all short right now and maintaining cash for opportunities on the long and short side. This will be a very different decline then what we have seen before so it's best to be a little cautious, there's plenty of opportunity to make money in a bear market.

Here's the DIA 1 min chart-note the accumulation right on the open as I suggested the Specialist would so, and they are selling into higher prices, maybe opening shorts as well. They don't establish a position at 1 level, but rather build a position and end up with an average price.

The DIA 5 min showing the accumulation on the open so it was pretty heavy to show up that fast.

The 10 min chart confirms the opening accumulation and the ongoing distribution and short selling by the locals.

Here we see much the same in the IWM 1 min chart.

The 5 min chart shows some extreme distribution into higher prices.

And it's filtering into the 10-min chart now as well

The same thing on the Q's 1 min chart

And the same on the 5 min chart.

Again, the same on the 10 min chart so we are getting pretty good confirmation of what the locals are up to.

The SPY 1 min chart still looking strong.

However the more influential 5 min chart that shows us what the locals are doing behind the scenes shows distribution/short selling.

And the SPY 15 min chart is showing the same.

So we may very well get some more upside tomorrow on a 1-day oversold condition as I'm guessing the dominant Price -Volume relationship will come in at price down, volume up after the close. However, Fear is very strong and anymore bad news could render the idea of overbought/oversold completely void in a market in which events occur that can't be discounted, this would mean something very bad would have to happen.

While the averages act the way I showed in the first two charts on a decline, individual stocks can and do decline regardless of market volatility, this is why we look for the highest probability trades and use strict risk management and wait for the trend to be confirmed before backing up the truck to load up on positions. Right now, preserving capital and entering sound trades is your best course of action. Swinging for the fences at market tops is very dangerous, especially when we consider this market is now unlike any we have ever seen with the Fed's POMO program creating massive long margin and the HFT firms totally destroying the liquidity providers that have been there to help keep a downtrend orderly. The SEC saw this coming last year and instituted the circuit breaker standards. However, if circuit breakers are tripping nearly everyday, this will only cause the market to sell off worse.

One last thing to consider-keep your eye on the trend, not the daily gyrations. Typically in a bear market decline you have more or about as many up days as down days, it's just the down days move down a lot more and the up days don't move up as much. It remains to be seen if that traditional bear market action will continue in light of the structural damage done to our markets by the Fed's constant pumping of the market which has caused traders to ignore risk and go long on excessive margin, buying every dip. Also the SEC has done nothing about the HFT and other exotic trading firms that have removed liquidity from our markets. Japan's market today was a preview of some of what we can expect when fear completely overtakes greed and there is no bid to support a falling market. This is why I say, it is those who adjust quickly to the new market, the early birds that will not only get the worm, but may be the only ones to survive the new market dynamics.