What's real too hard to believe…

Traders,

On we go to where who knows

To a place where there’s still non-believers

What will it take for heaven sakes

For those who find what’s real too hard to believe in

It’s that same old story again.

Stevie Wonder, Same Old Story

Our current position:

MARKET VULNERABLE

In this week’s edition you will find:

  • Where We Are
  • What Was Important About Last Week
  • What We Are Watching For This Week
  • A Word On Discipline

The following sections can now be found on our home site:

Where We Are:

Taking a look at the overall markets:

Recent seller domination in the broader markets has our Red Flag hoisted.

We’re sitting mostly in cash, with no reason to step back up to the plate unless conditions improve.

We’re waiting for a bounce to give us an idea of what sectors might turn into leaders should the market resume an uptrend.

Times of market correction serve as a reset for our measures of sector strength.

Energy has been the top dog for the past several months, though is showing signs of weakness.

Given the market’s historical tendency to turn weak after prolonged leadership from Energy, we should not be surprised to see a very rough environment for stocks as we finish the year.

Despite historical tendencies, we will trade what is, and not what should be.

The market has knack of shaking out traders that go with the herd.

Perhaps we’ll look back at this market correction as a time that shook out the bulls.

Perhaps we’ll see the market rebound to suck in a new crop of bulls to be spit out.

Perhaps the market will top and we’ll head into a cyclical move down as the “I told you so” bears proclaim the bubble of 2000 was only the beginning.

Who knows what will happen?

Why would you trust someone who claimed to know?

What would you least expect the market to do?

Amateur traders feel the need to know.

Professional traders know the market will do whatever it wants, whenever it wants.

Flexibility in bias pays in this business. Some people won’t accept this.

Our strategy involves a hit and run method. We lock in profits and hold on to our cash when the odds are against us.

It’s not rocket science.

Technically speaking:

The Dow Industrial Average ($INDU), -0.05%, is below all of its major moving averages and has formed a bearish head and shoulders pattern.

The S&P 500 ($SPX), -0.78%, is trading below all of its major moving averages, though has tested below an upward trend line and left a bullish tail.

Nasdaq ($COMPQ), -1.22%, %, is trading below all of its major moving averages, and remains in a triangle pattern for the year. Triangle patterns alone provide little indication of bias. We hate them.

Russell 2000 ($RUT), -1.74%, is trading just below its 200-day moving average, and is showing little evidence of pattern bias.

Volume indications continue to illustrate a seller dominated environment. Over the past two weeks the S&P 500 has made seven distribution days with no accumulation days. The Dow and Nasdaq have not performed much better.

.

New Highs – New Lows have slipped further down, with the Nasdaq marking a low for the year. This ratio for the NYSE and Nasdaq exchanges has been trending down for the past couple of months.

Investors Intelligence reports a predominance of bullish money managers over bearish money managers at a ration of 1.57. Markets have historically fallen apart with an excess of bulls.

Key chart action for the week:

Charts courtesy of Stockcharts.com

The 20+-year Note Holdr (TLT) %, is trading below all of its major moving averages , and broke below its upward trend line for the year.

The U.S. Dollar Index ($USD) is trading above all of its major moving averages, and is primed to breakout of a lower base. Should the index breakout, it faces overhead resistance from two years ago.

The Gold Miners Index ($XAU) is trading above its major moving averages, and has pulled back after setting a new high two weeks ago. There is no clear bias we see in the classic $DXC/$XAU struggle. Should gold gain a clear edge, we will likely see buying opportunities in the near future.

The Dow Jones AIG Commodity Index ($DJAIG) is trading above all of its major moving averages, and is pulling back from a new high three weeks ago.

Consumer Staples ($CMR) continue to consolidate as Consumer Cyclicals ($CYC) take a tumble further below its major moving averages. This is a bearish sign for the overall market.

Technology ($DJUSTC) is attempting to establish support at its 200-day moving average. The index has been surprisingly durable in relative strength, though not bullish.

The Semiconductor Index ($SOX) are attempting to establish support on the 200-day moving average. They are offering relative strength, though are not bullish.

Banks ($BKX) are trading below the major moving averages, and have bounced off the neckline of a bearish head and shoulders pattern.

Broker Dealers ($XBD) have slipped below the 50-day moving average, though remain a pocket of relative strength.

Retail ($RLX) is trading below all of its major moving averages, and has yet to show any signs of bullishness after a couple of months of the bears in power.

Internet ($IIX) is trading between its 50 and 200-day moving averages, and is showing modest relative strength.

Healthcare ($HCX) is attempting to establish support at its 200-day moving average.

Biotech ($BTK) is consolidating just below its 50-day moving average.

REIT’s ($DJR) are attempting to establish support at its 200-day moving average.

Homebuilders ($DJUSHB) are trading below the major moving averages.

Transportation ($TRAN) is consolidating in a year long bias with no clear bias intact.

Airlines ($XAL) have bounced after trading below a major trend line.

Defense ($DFX) continues to consolidate in a three month base.

Energy ($IXE) is trading below its 50-day moving average as it declined for the second week in a row.

Utilities ($UTY)

The top 10 industry groups from the 6 month RS screen are:

What Was Important About Last Week

STOCKS:

  • Alcoa (AA) reported third-quarter earnings of $289 million as it beat street expectations.
  • Genentech (DNA) said it earned $359.4 for the quarter as it beat Wall Street forecasts.
  • Apple Computer (AAPL) announced its
    quarterly profit quadrupled as it surpassed Wall Street expectations.
  • Advanced Micro Devices (AMD) said quarterly profits rose 73% as it beast street expectations.
  • General Electric (GE) said quarterly profits rose 15%, with mixed reactions from Wall Street.

ECONOMY:

  • Consumer prices were up 1.2% in September with a record 12% increase in energy prices.
  • Retail sales rose 0.2%.
  • Industrial production fell 1.3%

Key earnings releases:

  • MONDAY: Citigroup Inc. (C), General Motors Corp. (GM).
  • TUESDAY: 3M Company (MMM), Johnson & Johnson (JNJ), Merrill Lynch (MER), Yahoo, Inc. (YHOO).
  • WEDNESDAY: Amgen (AMGN), E*TRADE Financial Corp. (ET), Eastman Kodak Company (EK), eBay (EBAY), General Dynamics (GD), J.P. Morgan Chase & Co (JPM), Washington Mutual (WM),
  • THURSDAY: Ford Motor Company (F), McDonalds Corporation (MCD), Nucor (NUE), Pfizer (PFE), XTO Energy Inc. (XTO).
  • FRIDAY: Caterpillar Inc. (CAT), Schlumberger (SLB), Xerox Corporation (XRX).

On the economic front we have potential market movers with:

  • MONDAY: NY Empire State Index
  • TUESDAY: Core PPI, PPI.
  • WEDNESDAY: Building Permits, Housing Starts, Crude Inventories, Fed’s Beige Book
  • THURSDAY: Initial Claims, Leading Indicators, Philadelphia Fed
  • FRIDAY: none

The Following Sections Are Now On Our Home Site:

This Week’s Word On Discipline:

“ Freedom is not procured by a full enjoyment of what is desired, but by controlling the desire.” — Epictetus

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