Darkness before dawn?

Yes, it was a bit intense and surprising, a bad open surprised (no follow through on yesterday‘s reversal, no negative newsflow to start day) and a bad close surprised after Stimulus #2 was put on ice by a few (silly reason).  End of day, it wasn’t new negative eco’ data points, it was Macro Political noise that was the ammunition for the Bears.  We closed at SPX 881 and that alone will give all market participants something to think about. No doubt, there'd be some much debated discussion on how this market scenario will play out the next few days.　Why is that?  Well, we are currently sitting at the much talked about "880" psychological level (881-879 May lows, 875 April Highs), after breaking the Golden cross, even yesterdays support at 200ma. Now is the time to see if the much talked about buying support is there or not.  Tomorrow will be most crucial, especially close, as we hover around breakdown levels overnight. 
 
Without too much extrapolation or speculating on any fancy "what if" scenario, we have to focus on what lies ahead in the simplest way.　To us, there's likely two probable outcomes.　One outcome is that we simply move away (and up) from SPX 880 tomorrow and stabilize the recent downtrend before the earning season officially starts in a week or so.　The other outcome is that today's action will spook some institutional investors and they'd cause a further sell off (break down 880) next day or two.　In our opinion, this outcome is also likely and will create a "shake out" effect.　In this sense, we feel that it'd create some superb buying opportunity. We definitely hit correction part 2 as discussed from 930-935 and are only 2% (to 869) from a standard 10% correction from 956.

Now lets go over a few sectors just to make sure we're all on the same page still.

Commodities, this is one of those you either "love it or hate it" sector which we often refer to here as. The recent breakdown and some nasty action exhibited by the individual plays isn’t anything new. We have been cautious on this sector the last little as risk deflates and sold from recent recovery noise. This is the pain trade now. The latest breakdown, occurred in the steel sector, which was our favourite commodity group.　 Currently, we aren't looking to buy dips in any of the commodity groups because the earning power or the lack thereof is in question. This group is a sentimental bunch and it trades on emotion rather than facts.　Right now, there's general consensus that earning won't pick up until much later and we obviously saw a bit of that from SCHN report.  AA is on the podium tomorrow.

Financials,  this is the group which we feel will either keep the index level at 880 or breakdown. From the look of things lately, it seems to be holding.　Earning season usually kicks off with a bunch of financial stocks and we'd keep our eyes on them closely.  Regionals were very strong today as a tier1 note said quite a few will rally off earnings.

China/Techs/ Miscl., earnings linked stocks,  this is the group we refer to when we've been saying stay ’selective’, if you can’t wait for earnings.　 The market may play some tricky games at current levels,  but we feel any weakness from our favourite plays as a result of this market represent an opportunity.　The key is to stick with the proven winners.  You probably noticed eps winner DDRX  going from 10%+ down to erasing the morning loss by close. We've seen the same from STEC  recently.  Despite, Semi’s being upgraded by Merill/B of A , the tech group as a whole was hit again , only recent winner and yesterdays alert STAR  bumped +4% in the morning before succumbing at end to the rest of the tape.

We thought the earning season would be most interesting this month. However, it looks like the action prior to the earning season is even more exciting.  At these levels, the market is vulnerable once again, but realistically it needs some bad newsflow to breakdown.  The macro-political newsflow just before 3pm was a silly excuse to attempt such,  Briefingcom even went as far as digging up a 'terrorist' plot as a source for the unexplainable weakness. 

A jittery, jumpy market can swing both ways off any newsflow tomorrow, especially off these congestive technical levels that give both sides reason to move the tape.