Is This "Make It Or Break It" Time?

09/13/11 08:47:47 AM

by Matt Blackman

There's a pattern unfolding that could be trying to tell us where stocks are headed. What happens from here will say a lot.

Security: DIA, SPY
Position: N/A

Bulls issued a collective sigh of relief on Monday as the September 11, 2001, decade anniversary came and went without serious incident. And although Monday began as a tough day following sizable drops in Asia and Europe, optimism pushed the Dow Jones industrials and Standard & Poor's 500 indexes into positive territory as the close of US markets approached, buoyed no doubt by calls for more stimulus from the likes of Nouriel Roubini as well as a strange report that China was buying Italian bonds. (See Figure 1.)

FIGURE 1: DAILY CHART SHOWING BEAR FLAGS ON THE DOW TRANSPORTS ETF (ITY) AND DOW INDUSTRIALS ETF (DIA). As we see, IYT dropped below support on midday September 12 but managed to close above it.

Graphic provided by: FreeStockCharts.com.

A number of traders and technical analysts watched to see if key bear flag support levels for the major indexes would finally be broken. They weren't.

But it was a different story for emerging markets.

FIGURE 2: DAILY CHART OF THE ISHARES EMERGING MARKET ETF (EEM). Here's the bear flag support line breach on September 9 and follow-through confirmation on September 12.

Graphic provided by: FreeStockCharts.com.

As Figure 2 shows, the EEM bear flag, which was initially broken on September 9, was confirmed on September 12 with another decline on average volume. If we see selling volume continue to increase and prices weaken further, the risk is that emerging market weakness have the strong potential to derail bull markets elsewhere.

Roubini, who is well known for warning about the 2006 housing peak and 2008 financial crisis, has increased his probability for another recession to 60% "in most advanced economies," according to Bloomberg News.

"In the short term, we need to do massive stimulus; otherwise, there's going to be another Great Depression. Things are getting worse, and the big difference between now and a few years ago is that this time around, we're running out of policy bullets," according to a September 11, 2011 InvestmentNews.com report.

The problem is, if emerging markets from which most of the global economic growth is being generated keep heading lower, massive stimulus in industrialized nations won't do much long-term good for stocks or the economy. But it will propel commodities and precious metals higher and the dollar lower.

There are other reasons for concern based on history. A comparison of the Nikkei 225 from 1976 with the S&P 500 from 1990, discussed in my article "Rhyming Markets Tell A Troubling Tale" (http://technical.traders.com/tradersonline/display.asp?art=6190), is also bearish.

I'll be watching the various bear flags closely for clues.

Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of TradeSystemGuru.com. Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at www.twitter.com/RatioTrade

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Date:�09/13/11Rank:�5Comment:�Please keep us posted...

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Is This "Make It Or Break It" Time?

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