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Tuesday, August 24, 2010

The Storm Clouds Gather

Monday's price action continued to build on overwhelmingly negative investor sentiment, pushing many a chart to key short-term support levels in the process. August has a long-established tradition of being hard on equities, the retail investor has been spooked to the sidelines, and the 'dog days of summer' are barking loudly. It's difficult to imagine the 10:00 release of July's existing home sales data helping to lift the gloomy mood, not to mention the heavy economic calendar on tap for the rest of the week. Omens and prophecies aside, there is certainly near-term downside risk, and risk management continues to be the name of the game. If longer-term support levels in key sectors such as XLF crack, a sharper slide could ensue. On the positive side, the McClellans are starting to venture into oversold territory, extremely negative sentiment is typically a contrarian indicator, and the major indexes are probing their lower Bollinger bands. Overall breadth as measured by the McClellan Summation Index has weakened, but is still positive. There have been many nice trading opportunities for both bears and bulls, and while signs of sector rotation have been emerging, we'll see how stocks hold up during the rest of the week if put to the test.

Trade well.

-- Brinkley
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