S&P 500 issues sell signal at 117.60

SPY @ 117.60 violates 20-day low.

May 5, 2010 (before the market open in New York):   The S&P 500 has now confirmed a new downtrend, violating the 20-day low.  (I cheated a little and exited a few days ago at higher prices because the market had violated an up-trend line and was showing clear signs of distribution (far more volume on down days than up days)).

















Several things about this violation confirm a more bearish stance:
  - the 20-day low was violated with a close below the low - this alone should be enough, but...
  - it was a "long bar down day" with a decline of 2.35%;
  - it violated a pennant consolidation area forming on the wrong side of an uptrend line;
  - it occurred on very heavy volume;
  - distribution continues - 4 of the 5 heaviest volume days of the past few months have been down days and most up days have been on below average volume;
  - the failure to follow through on the 122.12 new relative high of 2 weeks ago is now confirmed (a failed signal is one of the most reliable signals).

Fundamentally, the backdrop remains difficult with financials clearly in the cross hairs of now awakened regulators.   Whatever the outcome of the GS criminal and civil probes, there is a chance that banks will go back to being banks, meaning a rather ho-hum, non-sexy business somewhat like utilities.  As the financial sector contracts to reflect these more realistic growth prospects (not to mention the enormous balance sheet damage that still must be worked off) you will see the S&P 500 dragged down.  Interestingly, though, this decline is not being led by financials (XLF), who actually had a better day yesterday than the broader market although still down sharply.   The big damage seems to be in Basic Materials (XLB) down 3.47% (Ultrashort Basic Materials SMN is a good way to play that move, up 7.72% yesterday.
The oil spill in the Gulf of Mexico means at a minimum off shore drilling is on hold and expect a flurry of new regulations and perhaps some closed or idled rigs.  All of this can be bullish for black gold but this could put a drag on the United States economy, just as the collapse of the price of oil gave an unexpected windfall over the past few years.
China, which has really become a leveraged bet on the American consumer, continues to sell off very sharply. ProShares Ultrashort FTSE, FXP, mentioned here last week, continue to surge, rising 7.5% yesterday alone and are currently 22% above their recent low a few weeks back.
Many interesting plays out there.  Fasten your seat belts!