It Has Begun

Despite all the warning the market has been giving for the past few week, I must admit I was caught by surprise by the magnitude of the drop today. I knew something was up when I saw deteriaration in the market internals despite an up day yesterday, but today was actually pretty staggering: market leaders got hit hardest, and most of the stocks I was watching took a pretty nasty beating. We easily got a distribution day today, which should be number 5 for IBD. That is usually the  signal that a correction is imminent; I imagine they will have the market under pressure in tomorrow’s issue. For now, it looks like the 50dma is the obvious target, but since we are not as high above it as we were last time we tested it, it might not hold this time. It appear the market is about to get it’s comeuppance.

The Nasdaq continues to weaken relative to the SPX, a condition which dod not prevent the market from hitting new highs last week, but also something that was no going to go on much longer. This is now almost at the 50dma, and I would be surprised if it held. This, I believe, is also at 5 distribution days.

Apparently the NYSE composite is no longer counted, because last time I saw IBD they did not have a count for this. Since the price relative line has been no help to us lately, they might be right in doing that. This is at the 50dma, and it would be a miracle if it held.

Here are the sectors ranked by RSI, and in the same situation we have been seeing for a few weeks: defensive sectors on top, dollar sensitive sectors at the bottom.

The extreme relative strength in XLV may be a reason why the market has not collapsed in the face of weakening internals. This has gone straight up in the last few weeks, and so has the price relative line. The problem is that this is not enough to keep the market going, andwill likely collapse under the weight of a dropping market. It is probably folly o try to predict a top here, but I did it anyway. I wouldn;t take it seriously. 

The weak get weaker. XLB is now on the verge of a major collapse, as price relative is entering a free fall. If you are looking to go short, there are going to be a lot of targets here on any bounce. The recent strength in the dollar, which seems to have been ignored by the overall market, has certainly not been ignored here, whihc is a good reason why I follow so many internals and place little emphasis on the broader indices.

It looks like the correction I have been expecting has finally begun, and it sure got off to a nasty start. The beauty of a correction, though, is that in a month or two we will get some awesome buying opportunities, and I plan to be on top of them.

I will have the new highs update shortly.

2013-04-03 15:31:08

Source: http://samuraitrader.blogspot.com/2013/04/it-has-begun.html