Buy Signal Valid - Market Sells Off on Heavy Volume

Thursday, May 06, 2010 (SPY @ 112.94 down 3.32%).

The dollar is going parabolic after a decisive breakout 3 trading sessions ago on massive volume.

The Euro is selling off with 4 gap down days in a row on very, very heavy volume.

Despite the dollar rally, gold, which usually moves inversely to the dollar, is rallying.  Some caveats:  we have been here before, some of this is reflexive buying in panic over the Greek-Euro situation, and there is heavy resistance at around 120, where GLD was turned back in December on very heavy volume (much heavier than the underwhelming up volume seen recently). 

Someone is selling Switzerland…

Beautiful double top in place for Homebuilders.

Financials have been breaking down all April, making lower highs with extreme distribution (much greater volume on down days than up days).   Is it too late to short these stocks?

The weekly chart says no:

Despite all the drama of a 1,000 point Dow plunge, this only brings the market (and the financials) to about where they were at the start of the year.  If the financials tested their March 09 lows, that would represent over a 50% additional decline from here. 

What's the easiest way to short the financials, even in a retirement account?  Consider the UltraShort Financials ETF:

Expect lots of choppy trading days ahead up and down, but the odds favor continuation of the selling seen today, perhaps in an even more dramatic fashion.  Traders and investors are still reeling from the psychological damage caused by the market's decline in 2009 and have all convinced each other that that is in the rear view mirror.  Perhaps not.  Another leg down could be much more precipitous as people rush for the exits.  They have seen this episode before, and it does not look like any central bank is able to bail out the world.

One conciliatory observation:  an intraday S&P 500 chart shows that the massive sell-off occurred in a space of about 10"; 20" after it had begun, the market was clawing its way back to where the sell-off started, then even rallied past the sell-off point, only to see-saw within a much narrower range for the rest of the session:

Still, the fact that the market could sell off so sharply for whatever reason in whatever time frame is unnerving and no doubt will have people eyeing their portfolios very warily going forward.