The DJIA lost 144 points and the S&P closed lower by 18 points. Volume expanded a bit coming in at 1.17 billion shares. The A/D line lost about 400 units. The new highs eased a bit as did the new lows. The Russell 2000 lost 4.38 points. It closed off its low but not by much. The short-term is negative. The medium-term is neutral but weak. The Value-line lost 11.26 points and closed near the low of the day. The short-term is negative. The medium-term is neutral but weak. The NASDAQ Composite lost 56 points and the NASDAQ 100 lost 56 points. They closed off their lows but not by much. They also moved below last weeks low. I am neutral for both the short and medium-term but with a downward bias. The DJTA lost 46 points. The short-term is neutral but weak. The medium-term is neutral but very close to going negative. The DJUA and UTY closed with modest losses. The short-term is neutral but very close to going negative. The medium and long-term remain bearish.

The S&P broke below the .618 retracement point of the rally from last Friday into Tuesday. More importantly, the decline from Tuesday’s high has traced out a classic five-wave pattern down on the hourly chart. This five down argues for lower prices. That can come in one of two ways. First, we could rally a bit in a second or “b” wave before moving below yesterday’s low or we could fall immediately and take out yesterday’s low. If the latter occurs we do run the risk of turning that five into a corrective seven-wave pattern but in either case yesterday’s low should be broken. The rally into Tuesday’s high stopped right at a 50% retracement of the decline from February 15 to February 23. The break of the .618 retracement of that rally along with the five down along with the 50% retracment make it likely that the decline from Tuesday is indeed wave .5 of iii from January 31 and a move below last weeks low is looking more likely. The DJIA moved below the .618 retracement of the rally from last weeks low and the hourly chart also shows a classic five-wave decline into yesterday’s low. This puts the DJIA in a similar position short-term as S&P. Where this fits in the bigger picture is not clear yet but it is expected that last weeks low should be broken. The NDX hourly chart from last Friday can be counted as a five into yesterday’s low. The NDX did move below last weeks low and that leaves open the possibility that the decline yesterday may have completed wave .5 of iii from January 24. However, the daily chart from Friday remains down and that leaves open the possibility that the decline may extend. It is also possible that this five is only the first wave of a larger pattern. However, the minimum requirements are in place now for the completion of wave iii from January 24. Support: S&P 1226-1228, 1200-1202, DJIA; 10,400-10,420, 10,180-10,200, NDX; 1840-1860, 1650-1675. Resistance: S&P; 1245-1246, 1256-1258, DJIA; 10,525-10,52, 10,600-10,620, NDX; 1960-1965, 2015-2023.

The market was down sharply yesterday with nearly every averages participating in the decline. The NASDAQ averages were the only ones to break last weeks low but the balance of the averages did take out important short-term support levels. The mate closed off its lows but not by very much and also sold off in the last few minutes of trading. However, we did get a minor reversal day. Volume expanded a bit over Monday. This confirms the reversal pattern and price action but overall, volume was quite low and is nowhere close to levels that would indicate a capitulation. Breadth was negative but also far stronger than the averages. The new highs eased a bit and the new lows expanded. However, the new lows were well below what we saw last week setting up a potential bullish divergence.

The CBOE put to call ratio was about where it was on Monday and modestly positive. The OEX ratio moved higher and was bullish. The Rydex ratios are close to bullish. The breadth and volume oscillator moved lower. The breadth oscillator is close to oversold, while the volume oscillator is oversold. The 3-day oscillator moved lower and is neutral. The McClellan oscillator is slightly oversold. The 10-day and open 10-day Arms are oversold. The 5-day Arms is neutral while the 21-day Arms is oversold and positive. The daily range oscillators are oversold and showing potential divergences. The daily trend oscillators are negative on the DJIA, S&P and NDX.

The averages cannot seem to rally together very much but they sure can decline together and we saw that again yesterday as they all took it on the chin and sold off sharply. Volume expanded on the decline. That confirmed price but is nowhere near levels that could be even remotely viewed as climactic. And a climactic give up capitulation is something I think we are going to have to see before this decline is complete. A complete purge may be necessary. Momentum indicators are oversold but as discussed yesterday this does not necessarily mean that the market is going to turn on a dime and rally. Frankly, these indicators have not reversed the sell signal from late January. We did get new closing lows in the S&P yesterday and most all of the indicators are holding above last weeks low. This could be the first step in reversing the negative pattern but nothing is close to confirming at this time. Keep in mind that the majority of the indicators peaked in late December-early January and the averages did not peak until late January-early February. Given the extent of the oversold readings last week we should expect a similar pattern in reverse. There has also been some improvement in the short-term sentiment indicators. The CBOE put to call ratio is near bullish and so to are the Rydex ratios. However, they are still not anywhere near where they were say at last April’s low or at the end of that decline in late May. And this may be necessary as well given the current market environment.  There is an outside chance that the market may just collapse but at this point I am still of the view that the market is closing in on a good medium-term low at least the S&P and the NASDAQ and once complete a solid and sustainable medium-term bear market rally should unfold. However, the final stages of the bottoming process are difficult and could be quite volatile and in some cases violent. Again I think we are getting closer but we are still not there. While I do expect to see lower prices to complete the pattern the technical cross currents and the bottoming process itself is difficult. I am going to remain neutral short and medium-term on the DJIA, S&P and the NDX. Long-term I remain bearish. The bonds remain in their trading range and are close to testing the upper portion of that range. They may continue to benefit from all the volatility in the equity market and we saw some of that yesterday. I am neutral short-term and remain bearish on the medium-term with the idea that we are close to completing a top. The XAU is most likely in a mall fourth wave from the February 15 low. The pattern should last a few days and help to correct some of the excess that as generated on the strong wave 3 advance. Prices should be well contained and I remain bullish in all time frames.

Stock index futures traders are flat. Stand aside for the morning. Rydex switchers are holding a 20% Ursa and 40% Precious Metals position. Make sure to call the Noon Pacific hotline for any changes.