Category: US & Canada

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.