It was a clear-cut victory for the bears today. After some mediocre action on Monday, the dip-buyers were quick to jump in this morning but found themselves trapped when good housing and ISM numbers were aggressively sold.
The dip-buyers have not found themselves trapped in a quick reversal very often in recent weeks, so it had a rather profound effect today when we reversed so quickly and with such vigor.
Not only was the reversal quite vicious but volume was heavy and breadth quite poor. There was no late-day bounce and many leaders were hit hard, particularly in the financial sector.
It was one of the most bearish days we have had in a while, but in the bigger scheme of things we have yet to do very much technical damage. The S&P 500 is still above its August lows and is just barely trading down to the highs we had in July. We broke the 1000 level and there isn't much support down to 975, but this is still just a pullback within a trend rather than a reversal of the uptrend that started in March.
Nonetheless increased caution is certainly warranted and you should make sure you stay particularly nimble. This action is a change in character and that means dip-buying is likely to become much more difficult as market players focus more on selling strength.
I still believe that there are some tenacious bulls out there who are hungry to buy pullbacks. The dip-buyers were frightened away today and the dip-buyers are the key to this market. If they lose confidence it is going to be a nasty ride, but one good smack like we had today is probably not enough to completely demoralize them.
It is a start, but conditions for bounces remain quite good. The way they play out in the next few days will tell us much about the health of this market...