has once again dropped below the rising trend line and the 50-day EMA.  I will count this as day 3 despite the one day move back above them.  Not being able to hold above after the one-day rebound is not a good sign. 

The PMO is in strong sell signal mode and, it's tough to see, but there is now a lower low on the MACD indicator, while the S&P 500 has not made a lower low.  This is a negative divergence.

You can also see above, that the volume was higher during the two big down days (Wed. and Fri.) than during Thursday's rally.  That could be telling us that the bigger money was a little skeptical of Thursday's rally.

I want to take a closer look at some of the major indexes that we follow to see how things are playing out.

You can see in the first chart of the S&P 500 that the early October low is still holding and that keeps the index in an uptrend officially, but we know from the chart above that the longer-term trend has broken.  Some positive, some negative here. 

                                   

The Dow is in a better situation.  The trend remains up, it has not broken the long-term trend yet and found support at the 50-day EMA (not shown). 

                     

But the Dow consists of 30-stocks and is not a great indication of what is happening in the broader market.

The Dow Transports have broken down, no matter how you look at it.  This is the market leader and this is a major concern.  It did find support at the 200-day EMA on Friday, and that is the only hope it has right now.  This could mean the S&P 500 is next to test the 200-day EMA.

                     

The other leader, the Nasdaq, has broken its long-term support (not shown) but hasn't quite made a lower low yet. It needs to move higher early this week, and stay up or this picture turns as sour as the Transports chart above.

                     

The mid-cap chart has broken the longer-term support, and made a lower low, which tells us that our S-fund could be in trouble.  It will likely follow along with the other indices but during a recession recovery, small and mid-caps usually outperform, but right now they are not.

                     

Here is the real trouble; the Housing Index.  Not only has it broken its longer-term support and made a lower low, but it has fallen below the 200-day EMA and has broken down from a head & shoulders pattern - rallied back up to the neckline - and failed.  This chart looks bad and if the housing market is in trouble, I'd say the economic recovery could also be in trouble.

                     
                 Charts provided courtesy of www.decisionpoint.com, analysis by TSP Talk


We have a new set of interfund transfers to work with now that November has started, and while the market might be due for a rebound from its oversold levels, you may want to stay defensive - or be very nimble with your trades.

I was burned badly in 2008 trying to buy the oversold sell-off in October last year, and rather than locking in some quick big gains, I ended up watching the gains disappear and then some.

The week of October 6 - 10 in 2008 was brutal.  But on Friday October 10, the market was so oversold that a rebound was imminent. Sure enough, late in the day the market started to rebound and by intraday Tuesday, October 14th, the S&P 500 had rebounded an astounding 24% from bottom to top. 


                  Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

It was an amazing run that I was in on, but it quickly faded and with investors still in "buy the dip" mode today, I could see many of them being caught in a similar situation. 

There is one big difference between today and October 2008 - we were deep into a bear market last year and this year the indicators, particularly the EMA's, are still telling us that we are in a bull market.  Of course the only way to go from a bull market to a bear market is to experience more downside action.  If that happens, we'd likely see a break of the moving averages, followed by rallies back up to them.  In other words, you could get some opportune rallies to sell before any serious damage is done, but why take the chance and stay in now that we are seeing things break down? 

It's not an easy call because if the market is going to rally, it would be doing it now, this week, and being too defensive keeps you out of the game.  But the cracks in the wall are showing and preserving capital may be your best strategy.  If you do take some chances, I'd suggest being quick and if you are wrong, don't let the market take you down with it.

The recent TSP Talk Sentiment Survey came in 37% bulls, 49% bears for a 0.76 to 1 bulls to bears ratio.  That ratio also keeps the sentiment system on a buy signal for next week.  Either that or TSP Talk's readers may have become the smart money.

That's all for today.  Thanks for reading.  We'll see you back here tomorrow!