Conditions Have Changed « Market Montage

Yesterday morning I noted the gap up in the market was happening despite a litany of divergences – a few of them included a lack of new 52 week highs, relative strength at much lower levels than recent index peaks, defensive sectors taking over leadership last week, etc etc.  It was also happening despite a slew of bad news such as poor Chinese flash PMI, a downgrade of UK debt, and the coming sequestration.  If you have been following the market closely the past 4 years it has to be noted how much of the gains have come in premarket / overnight moves.  Some of that can be traced to the situation in Europe wagging the dog but there have been many days stocks simply gap up for no particular reason and the actual market session is at best flat or down.  This helps those who are 100% long all the time, but is more difficult for those with tactical approaches.  Yesterday was an extreme but in premarket you had a +0.6% type of gain and if you bought the open you were down not just the 1.8% during the normal session but an additional 0.6%; punishing.  But typical of the the 2009- era.

Starting with the FOMC minutes release Wednesday afternoon some intense selling pressure has finally arrived in the market.  After a two day selloff, the Pavlovian response to buy any dip remained strong and it was followed by two gap ups.  That said, Friday's volume was miserable (on an up day) while volume on the selloffs three of the past four sessions have been elevated.  This is a sign of distribution.  For those who follow IBD methodology they went from market under pressure last Wednesday to correction yesterday.  No surprise there as the # of distribution days clustered together is now apparent.  Now we begin the intermediate process of correction and caution is warranted until we see a reversal type of day similar to the one last November.  It need not be the 10-20% correction we have been trained to expect every year, but always has the potential to be.

Technically the channel the market had ridden since mid November was broken for the second time in three sessions.  What looked to be a headfake yesterday morning during the premarket gap up proved not to be after all.  Specific to the S&P 500 I have reposted the Fibonacci retracement levels I posted last week within the same chart as the ascending channel.  Last I put a very obvious support level of the September 2012 highs, which also happily coincide with the rising 50 day moving average.  That is an obvious level for bulls to put in a stand – the question if/when the index gets there is again the nature of that bounce: transitory (cursory) or lasting.

As always the market affects psyche and a litany of issues that were ignored/waved away suddenly come to the forefront.  I won't repeat them because they are well known.  Today we have the magic that is Ben Bernanke on Congress (tomorrow too) and a week back heavy of economic data.  Volatility has obviously picked up tremendously so the day to day swings should be exaggerated but until a clear bottom is in place and a new uptrend established, it will just be relatively random movement.

Both the yen and U.S. bonds rallied sharply yesterday – the former has been the nexus of much of the rally, but the currency has fallen to spring 2010 lows from which a bounce would be expected.

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