Broken? Or Resting?

After the earnings reports from AAPL and IBM on Monday night, it looked like we were in for a sell-the-news reaction. The reports weren't bad, but expectations had moved a bit too high after the good report from GOOG.

If all we had was a simple sell-the-news reaction to earnings, we probably would have shrugged it off fairly quickly. The problem was that that bad news was hitting every sector of the market. A stronger dollar and an interest-rate hike in China clobbered oil, gold and commodities, and concerns about banks being held liable for bad mortgage paper caused a big reversal in the banks after a good open.

With technology, energy, commodities and financials all under the pressure, there was no place to hide in equities, and we saw money flow into bonds. It was just a dismal day of distribution, with breadth almost five-to-one negative on increased volume.

The big question now is whether this is just an ugly hiccup in the uptrend that has been in place since September 1, or the start of a major trend change? We held support at 1160 after a bounce in the final hour, so no real technical damage has been done yet, but the fact that little was left unscathed is a problem. We've had some very frothy momentum action in various areas of the market lately, and that has left us with limited underlying support in places.

Two groups that are good examples of how fast charts can break down when momentum leaves are cloud computing and solar energy. Stocks in both groups have pulled back very sharply and look quite poor. If that sort of momentum selling spreads, there are going to be some landmines to contend with.

On the bullish side of the ledger, we have to keep in mind that the Fed is going to blast this market with a flood of liquidity at some point when it implements QE II. We have witnessed the power of that for the last six weeks, and while we may have gotten a bit ahead of ourselves in discounting the news, I don't think QE II is finished in terms of being a positive SHORT TERM TO INTERMEDIATE TERM market catalyst. Long term? It's toxic....

Right now, we obviously have to play tighter defense and not let losses get out of hand, but the bulls are still in the game. This market isn't broken yet.

long AAPL