MC Hammer

As trading began this morning, equities continued to bleed from yesterday's plunge. But as I mentioned yesterday, most indices are near very important long term trend lines, so it seemed too much to ask for the market to continue its relentless dive - a breather seemed to be in order. Then surprisingly (or I guess not so surprisingly), the markets started turning green around 2pm and managed to close above their open. Consumer staples (food, beverages, tobacco...) and non-cyclicals led today's afternoon rally. But, the H/L differentials of each index depicts continued interior weakness in the market, despite what the averages said today. The Nasdaq, for example, made only 28 new highs compared to 251 new lows today. However, I cannot ignore the hammer that formed today for NDX, and thus cannot rule out a mild bounce (although a similar hammer back in June turned out to be a false signal). Moreover, I expect the Dow to rebound as well from its support level (tested today) of 10700. However, looking at the very weak volume for the Dow today, I am not sure how strong the rebound may be. Moreover, there will be important data released tomorrow such as the core CPI and Bernanke's testimony at Congress that may depress many assets. Finally, I checked out the chart for Google and found that it made an Evening Doji Star (bearish reversal pattern, but based on weekly candlesticks) earlier this month. Moreover, it is very clear that the uptrend from the 340 level in March has not been supported by strong volume. Instead, a descending triangle has been forming (volume heavier on the downside and lighter on the upside), and while the descending triangle is a continuation pattern usually found at downtrends, they can also be found at market tops signalling a reversal. I can't see Goolge holding its 400 level for long (by the end of the week), and we may easily see a drop back to 340 or even 275 in the coming weeks. This breakout to the downside should be accompanied by heavy volume.

Rec: Short GOOG (Stop at 400)