Indications of More Selling at Recent Market Top

On Monday (10-26-09), the major equity averages experienced a sharp reversal of the morning's gains, with the Dow falling ~200 pts. As mentioned at 11:51am, two factors contributed to this sharp pullback:

1) The euro weakened vs. the dollar (euro fell below $1.50/euro), sending the dollar index into positive territory in a relatively swift move

2) The Nasdaq 100 failed another attempt to break out to fresh 52-week highs.

The combination of the technical failure in one of the strongest segments of the market (big tech names have been recent leaders) combined with dollar strength (which weighs on anything dollar denominated, most directly energy- and metals-related issues), caused longs to bail out of positions that were being held in front of a potential breakout. In addition, there is some general chatter out there that could be contributing to the weakness (eg, BAC may need to raise more money and concerns about Brazil continuing to aggressively buy dollars), but this seems to be secondary in nature.

After last week's back and forth trade, the market came into the week looking for direction. It's a busy week ahead with many potential catalysts, as it is the peak week of Q3 earnings season (~150 S&P 500 cos report) and advanced Q3 GDP is due out on Wednesday morning, so the markets will be taking their cues from many different areas. For now, however, with few other catalysts, the swift move higher in the dollar coinciding with the technical failure in the tech space was enough to turn early strength into mid-day weakness

Our work using Market Structure and Auction Market Principles tells us that if the S&P breaks below 1064 to 1055, it would signal a more definitive case for intermediate correction. The broader stock market has risen in each of the last seven months. Smart money for a number of fundamental and technical reasons could be getting increasingly nervous about locking in profits through earnings announcements. So far the group of main leaders have not shown any significant signs of breaking down and would be exhibiting some signs of distribution or selling if this in fact is the beginning of a correction. This week a battle seems to be starting out between bulls and bears and if smart money begins to run for the exits, it will be quite apparent in the market. Stay tuned!