Be Ready For A Selloff This Week

While I would not be surprised to see continued indecision and low-volume buying early in the week, I am preparing for a big price drop for equities and commodities. A few factors to consider:

- Stocks rose very briefly last week on the FNM (FNM)/FRE (FRE)takeover news, then quickly moved lower. This is the weakest move we have seen after such significant news of government intervention during the current crisis, indicating the feds are running out of power to put a floor under the market.
- A number of sector charts are technically damaged and running into resistance on decreasing volume.
- Commodities and energy shares got their bounce (predicted in my Thursday post). They may have a bit more room to run, but not much. While I asserted the “commodity bounce may have legs” last weekend, now I think not.
- Emerging market charts look terrible.
- Financials, housing, and consumer discretionary sectors are still high above their July lows and have demonstrated resiliency as commodities, technology, and emerging market shares have plummeted. If financials start to break down with greater conviction (following LEH and MER), it will mean big problems for the broader market. Last week I heard someone say, “The government is not letting the market correctly value the financials,” which I thought was an apt statement. It is only a matter of time, and I think sooner rather than later.

On to some charts:

- Financial Select Sector SPDR (XLF): Volume patterns indicate many people still want to buy financials, or else there have been too many shorts in the market. This is a house of cards, and simply a matter of time before we head down toward the July lows. Watch for a break below 19.70.

- Regional Bank HOLDRs (RKH): Regional banks are trying to rally above the 110.00 level. I think this will turn into a failed breakout very soon.

- Wachovia (WB): I post this chart often because of the company fundamentals. This stock is destined to follow LEH (LEH) and MER (MER). Watch for a break below Thursday’s low to start shorting aggressively. I’m already in.

- US Bancorp (USB): Getting ready to make new highs? I don’t think so. This is the market in “highly irrational mode”.

- Wells Fargo (WFC): Ditto.

- MidCap SPDR (MDY): Midcaps are in a downtrend with layers of resistance above.

- Industrial Select Sector SPDR (XLI): Industrials are at resistance.

- Materials Select Sector SPDR (XLB): The materials ETF broke down out of a diamond pattern, and has retraced to resistance. This is a clean and reliable pattern. I am playing this via SMN, the ultrashort ETF.

- Companhia Siderurgica Nacional (SID): This Brazilian steel producer may have more upside based on Friday’s volume. It will be a great short sale around if it gets to the 34.00 area. I doubt it will get that high.

- iShares FTSE/Xinhua China 25 Index (FXI) has broken important support and is a good short now.

- iShares MSCI Brazil Index (EWZ): The Brazil ETF has also broken key support, and is bouncing toward resistance. I am looking to enter a short position on a move toward 68.00, or if I see commodities start to weaken again.

- Crown Holdings (CCK): This is a great short entry.

- Terra Industries (TRA): I started a short position in this fertilizer company, along with MOS and CF. I will give it some room in case the commodities continue their rally, since I feel confident the trade will pay off.

- CF Industries (CF): Similar chart. Two years ago this stock was at 17.00.

- Corinthian Colleges (COCO) dropped from a high of 18.25 to 6.45 early this year, then climbed back to near its previous high. August earnings saw it drop on heavy volume, then a low volume climb back to its breakdown level. Great short.

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