Yesterday's pre-open futures jack failed to hold as all of the major market averages reversed sharply on huge selling volume, triggering a sell signal in the Market Direction Model. Members should refer to yesterday's MDM report for details. Generally, high-volume reversals such as we saw yesterday are particularly bearish patterns. Small-cap stocks got hit the worst as they tend to be the most volatile, but leading stocks across the board took some serious heat. While quantitative easing is in force, price/volume action takes precedence given that we already know that even in a QE-laden environment the market can move rapidly to the downside before stabilizing.
Precious metals continue to find support off of their 17-month lows, with gold moving higher yesterday and this morning as it pushes up against the $1600-an-ounce level. If the PMs counter-trend the market as they did yesterday, then this is likely a clue that the market is discounting something more serious than simple "worries" over sequestration. The fact that Chinese officials were out last week talking up the dollar makes us suspicious as to their motives given that they are large holders of dollar-denominated securities, namely U.S. Treasury bonds. Is this sort of "talking their book" intended to assist their ability to unload Treasuries? The answer to that may be forthcoming, and we would watch the action in precious metals, the dollar, and bonds for clues in this regard.
Given the massive reversal in the general market, a number of leading stocks traced out similar patterns in Monday's action. In most cases maximum downside stops were likely hit, and members, as we've indicated in previous, recent PMP reports, should be very careful here and not allow profits to deteriorate or even disappear. Housing stocks got hit hard as they begin to veer from the type of action we saw in their November 2012 pullback when they were able to recover after a single move down to their 50-day moving averages. As the alleged "recovery" in housing has been cited as one under-pinning of the tepid economic "recovery" we saw in 2012 that produced all of 1.2% GDP growth, this likely bodes badly for the economy going forward.
As always, price/volume action rules all and we remain attentive to this as we seek to profit on any continued correction and downside move in the general market.