Market Correction

Yesterday was a heavy liquidation day across the board as volumes picked up and ATR's expanded -- an indication of short term directional change. Yesterday I pointed out the importance of price acceptance/rejection above 2011 highs in the major indices. To follow on that thought process, we can view the futures this morning and have a look at the structural precipice of the Dow (YM #F) - sitting at a precarious  level of monthly structural support as per the brown horizontal channel line at 12678. Yesterday, the Dow futures broke down and closed the day below the 2011 May and July highs, which as stated implies rejection of new 52 week highs and a need for continued price development, given the extent and duration of this rally. Today, we can see the market is attempting to challenge this important level again as per action in line with the black line reflecting 2011 highs. More importantly, if Dow mini's close below the monthly structural support at 12678 on a weekly basis, this market correction will be much deeper.

We looked at the $TRAN (Cash Transports) yesterday and discussed the non-confirmation new 52 week high in the index. We can see the ominous action in the Transports below as they come back into monthly support at 5000. If this market breaks 5000, the corrective action will be much deeper.

We can also bring in some perspective from the macro-weekly overlay line chart below looking at the Dow (Blue Line) and Transports (Black line) correlation since 2006/7. From above we looked at TRAN non-confirming the new highs but below TRAN are trading near all time highs (Black Line) vs DOW (Blue Line) which is clearly lagging. The recent erosion in TRAN looks to be closing the weekly DOW/TRAN spread and explains the recent directional weakness in the TRAN index relative to DOW on the day chart. This chart would imply DOW outperformance going forward as a result of its lagging behavior. We could also trade the Dow from the long side on any short term long momentum signal, hedged against the TRAN until this weekly spread comes back in line.

Lastly, we can take a look at what will be a key piece in determining the timing of any potential reversal in this market: AAPL. Yesterday's action in AAPL did not demonstrate significant weakness. We can see from the 'Red Arrow' below and 'SE - 628.56' that a short term momentum sell signal was generated. Looking closer, we can see that AAPL continues to trade decisively above its 3 day pivot regression (defined by the pink visual overlay structure), implying that the short term bias has remains up. We would need to see a significant liquidation event to imply the end of this trend. Structurally, AAPL trades within its weekly channel as per the blue horizontal overlay lines. This channel signifies that the intermediate trend is up. For longer term investors any daily closing violation below the lower weekly boundary at 600 would imply reducing long position or taking profits as a much deeper correction would develop. We would have to remain agile at these levels, as per yesterdays 'tell' based on our 'SE' (Short Entry) at the 3 day time frame level or short bias would suggest that trend is showing 'cracks'. In that line of thought, any 2-day closing violation below the regression would signify potential further downside corrective action. We will have to monitor this market as it could be a potential leading indicator into the depth of corrective action.