S&P 500 sinks to near-term trendline

Market Snapshot for session ending 9-6-11:

Market Overview – What We Know:

• Tuesday’s selling caused S&P 500 to sink to and just through bottom of 10-Day Price Channel (1158.07) before stabilizing and recovering into the close. After hours futures trading demonstrated further recovery.
• S&P also found short-term support at rising uptrend line stretching back to August 9 low with second point of contact on Aug. 22.
• S&P has also traced out what looks like classic bear “flag” in a larger cycle downtrend.
• Resolution of pattern would come with downside break below trendline and Price Channel with subsequent selling to new lows needed to re-assert larger cycle negative.
• Cumulative Volume that failed to confirm strength into August 31 short-term high (1230.71—S&P) continues to look weak and could make new lows with modestly more selling.
• Trading volume on NYSE increased by nearly 18% Tuesday with S&P Emini futures volume ahead by over 45%.
• Daily CPFL declined to new short-term low Tuesday for 23^rd session in a row. Put Dollar Volume was ahead of Call Dollar Volume by 1.59 to 1.
• Daily MAAD data was net negative by 3 to 16.
• Major resistance holds at Head and Shoulders Neckline (1255) in S&P 500.

Market Overview – What We Think:

• We suspect time is running out on this short-term countertrend rally that began after early August lows.
• We could still allow for strength to “Neckline” resistance (1255) in S&P 500 of recently violated Head and Shoulders Top, but increasing downside volume on market weakness is yet another indication that market internals remain poor and a sign there is little chance major resistance at1255 level in S&P 500 will be overcome.
• Ongoing deterioration in Call/Put statistics via CPFL simply underscores fact that strength over past month has had weak underpinnings
• We continue to suspect any buying that develops will do so within context of still negative Intermediate Cycle and still challenged long-term uptrend.
• Failure of Cumulative Volume in cash S&P and S&P Emini to better mid-August indicator resistance is an indication weaker hands have been fueling buying over past several days.
• Price action and volume are consistent with bear move retracement.
• Any strength that develops should prove to be no more than weak bargain hunting/short-covering.