Butt Ugly!… and then some…

Last week we referred to the post-election price activity as half-ugly, but warned it’d get butt-ugly if we saw further slippage. Well, the Nasdaq COMPX has slipped into correction territory and the INDU and SPX are headed there quickly, each down over 8 percent and now both decidedly below their 200-dmas. By any measure, that’s butt-ugly!

View it however you will, the gamesmanship and shoddy leadership outta all sides in Washington have us fast approaching the looming fiscal cliff…In response, the market is heading off a cliff of a different sort.

No doubt the post-election wave of broad selling has gotten in front of itself and stands currently oversold by a good clip. Nonetheless, the uncertainty brought on by the fiscal cliff remains unabated. Translated, lots of peeps are genuinely worried the pols will once again screw things up…and with good reason… If memory serves, this foreseeable disaster is the result of these same pols playing games not-so-long ago…

Now I’ll admit that it’s a bit of a reach to get real optimistic here, but the broad indices did all manage to recover most of their early-session losses late in Thursday’s activity. Might this be a signal we’ve reached an oversold point and the smart money is swooping in as usual to buy when the blood is running thick and hot in the streets?

Maybe…but frankly this don’t seem so nasty…yet…

Fact is the INDU is sitting on some decent support where it stands now. But it has to hold here or it’s pretty fair to assume it’s headed for key support back at 12k.

Because of the significance of the respective channels (dating to the March 2009 lows), I believe they stand a decent chance of holding, if so tested. If they do fail, then you are looking at some serious blood in the streets. Frankly, crush-down moves to and slightly through those key levels would entice me and a fair share of blokes into an aggressive long-side trade on those very indices.

Moreover, we’re those levels to fail, it would portend very badly regarding the collective confidence in the US economy presently…and more so for the foreword outlook.

But those are big “ifs” and we’re not there yet. For now we’re ugly, but not necessarily nasty. Looking ahead, just as mentioned a week ago, it’s fair to expect we’re due for a “plus” day or two to staunch the bleeding.

That said, it must be noted that the VIX ain’t exactly screaming “watch out—this is waaaaaay overdone.” In fact, the current level just shy of 18 is the same as a week ago and not that far north of the lows (below 14) that prevailed during the listless activity of months recent. The consolidation and coiling I’ve written about with frequency in the last several months remains in play.

It’s also worth remembering that were the SPX to trade down to channel support, it would have nixed 18 percent off its recent high. That’s a big yeeeiikkess.

Whether we see those key tests materialize, it’s still work stepping back and asking the same key question laid out a week ago…namely, when viewed in relative fashion, are we really headed back to the dark days of just the past several years? No doubt the obvious wild-card is Israel and the rest of the Middle East. If they really go off the deep end, then we got much larger problems. If they somehow manage to avoid war and keep the Iranians without nukes, then they will have dodged a bullet and our markets may well be off to the races…

We shall see…

~LH