We have a clear bear market signal across a wide range of indexes and current behavior is typical of the early “Denial” stage. If we look at 2008, the Dow broke primary support at 12800 in January, falling sharply before encountering strong buying support at 12000, signaled by weekly volume over 1.5 billion . The rally failed, but buyers again snapped up bargains, with weekly volumes  above 1.5 billion. A third rally even penetrated resistance, but buyers soon lost interest and the next down-swing  led to a strong bear market over the next year.
Current buying support, with weekly volume close to 2 billion  is typical of the first stage of a bear market . Expect a rally to test 12000 followed by another test of support between 10600 and 10800.
* Target calculation: 10800 – (11800 – 10800 ) = 9800
Friday’s doji candlestick on the S&P 500 Index indicates hesitancy, and 21-Day Twiggs Money Flow below zero warns of selling pressure. Breakout above 1200 would indicate a similar rally to test 1260, but reversal below 1100 would signal another down-swing.
* Target calculation: 1125 – ( 1250 – 1125 ) = 1000
The Nasdaq 100 Index displays stronger buying support, as evidenced by the long tail and small bullish divergence on the weekly chart. Expect penetration of resistance at 2200, but the primary trend remains downward and reversal below 2200 would confirm.
* Target calculation: 2200 – ( 2400 – 2200 ) = 2000
For those who follow classic Dow Theory, the Transport Index broke below 5000, confirming the bear market. 63-Day Momentum further strengthened the signal with a strong fall below zero.
* Target calculation: 5000 – ( 5600 – 5000 ) = 4400
The Loonie fell sharply against the greenback before finding support at parity. Currency markets are volatile at present, evident from the wide consolidation between $1.00 and $1.025. Downward breakout would signal a decline to $0.94*, while recovery above $1.025 would indicate a rally to $1.06.
* Target calculation: 1.0 – ( 1.06 – 1.0 ) = 0.94
What I’ve seen is a real divergence in world views between the President and his party and where most of us as conservatives are……. If you hear them speak it’s always about everyone must pay their fair share and I think the difference is we believe everyone should have a fair shot. It really is a difference between whether you think government is in place to ensure equal outcomes or whether we should as elected officials try to promote the situation where everyone has equal opportunity to go and earn the outcome.
~ House majority leader Eric Cantor
The Dow Jones Industrial Average broke primary support at 11800 but encountered buying Friday around the former primary level of 11500. We may witness retracement to test resistance at 11800, but this is expected to be overwhelmed by sellers. Medium-term target for the down-swing is 10800*.
* Target calculation: 11800 – ( 12800 – 11800 ) = 10800
The Nasdaq 100 fared better, recovering above primary support at 2180. But Twiggs Money Flow below zero, and the earlier bearish divergence, warn of strong selling pressure. Failure of support is likely and would offer a target of 1920*.
* Target calculation: 2180 – ( 2440 – 2180 ) = 1920
The TSX Composite Index was one of the first markets to enter a primary down-trend and has now confirmed with a break below the latest support level at 12750. Expect some support at the target of 12000* but the July 2010 low of 11000 beckons.
* Target calculation: 12750 – ( 13500 – 12750 ) = 12000
A friend at golf yesterday, who still holds a number of stocks, asked if they are likely to fall any further. My answer was that holding on to stocks in this market is like standing in front of a stampeding herd in the hope that it will stop before it reaches you. There may be a short retracement early in the week, but strong selling is expected to overwhelm buying support. On August 3rd I gave the probability of a down-turn as 75 percent. The odds are now about as close to 100 percent as you can get.
The S&P 500 followed through below support at 1250, confirming the primary down-trend. Friday’s brief rally was swamped by further sell orders. The herd has started to move. We are beyond the tipping point.
Posted August 3, 2011 8:00 p.m. ET (10:00 a.m. AET) on Trading Diary.
The long tail on today’s candle for the Dow Jones Industrial Average indicates buying support, but 21-Day Money Flow below zero warns of longer term selling pressure. Only recovery above the rising trendline would call the bear signal into question. Follow-through below today’s low at 11700 would confirm the primary down-trend — as would a close below 1250 on the S&P 500.