Check out the flow of charts on Chart.ly tonight.  Chart,ly is an excellent tool, if you know how to use it.  Taking a tip on a chart from someone without doing your homework first is just as bad as taking the word of that guy in your office who’s broker says to buy XYZ because it’s the hottest new company.  Chart.ly is an idea generator, as well as a tool which can be used to confirm or refute how you see the technicals of a certain issue.  On top of that, I use Chart.ly to survey the psychological landscape of market.  When the market moves up you often see the time frame of the charts decrease and momentum players post small cap stocks.  When the market moves down as it has over the past few days we begin to see longer time frames, technicians searching for support, everyone trying to be a macro thinker.  I’m not saying there is anything wrong with this, in fact I believe it’s healthy, but there is something to be learned from this behavior as I’ve seen it happen at the end of every market dip during this rally.  Does that mean the market will bounce, no.  What it means is that traders are both a bit scared and a bit lost.

Let’s take a look at some important indicators and issues to try and make sense of where we are and where we are possibly headed.

We failed to hold the 50 day moving average as the market melted down into the close, this is significant as it was the first time the 50 day was broken since the July shakeout.  To the right you will see the very obvious negative divergence on the MACD chart.  If we continue down from here and cross the 0 line this rally will have a lot moving against it.  Everyone came out this afternoon yapping about the momentum indicators being greatly oversold.  True, as you can see down at the bottom right they are, if fact the most oversold since the March bottom.  But look again at that March bottom and how long the stochastics were in an oversold state, 2 weeks!  This was day 2 of oversold territory.  It would not be pudent to continue putting on new short swing positions at this point in time, but we are still at an absence of seeing anything on this chart which says this move is over, other than the fact that we are vastly oversold short term.

As I’ve said many times before, this rally has been about one thing above all others, the desire of investors to increase risk.  Well, that’t obviously changed over the past week as all risky assets from forex, to commodities, to bonds, and equities have been sold.  Below you will see in the larger white box the higher risk higher reward junk bonds getting hammered while the safer corporates and treasuries rally as investors move to shed risk.  But something interesting happened into the close today that may give the bulls some hope.  Treasuries and safer corporates rolled over as junk bonds rallied.  I wouldn’t put too much weight behind this little blip, but none of the less, it’s  something to watch going into the open tomorrow.

As expected, small caps and emerging markets have led to the downside, pulling back twice as much as the large cap $SPY.  Risk aversion in its simplest form.

We know that the US Dollar rules all, it is in fact what began this sell off.  The bounce from oversold conditions was rather obvious in the coming, we knew that unless there was a real capitulation move lower which sent equities surging, the dollar was going to see a relief rally at some point.  The speed and force with which the $USDX has surged though has been impressive, and has resulted in an overbought reading on the stochastic oscillator tonight.  Here’s my take, until we break the downtrend and get the 50 day moving average to flatten out and turn up, the trend is still down and should be treated so.  One thing to watch, as on the $SPY chart, the MACD reading here is giving an positive divergence, but until it crosses through the 0 line, it’s not a buy.

I continue to believe that if and when the dollar rolls back over, gold will lead us the next leg up in the market.  As I predicted when I entered this long $GLD trade at 95.41, we were bound to get a retest of the neckline after breaking out to new all time highs.  Well, here’s the test.  If we break support watch out, it could signal a bottom in the dollar and a huge fake out in gold over the past few weeks.  Nothing saying this run in gold is over though as the momentum is still there, higher highs and higher lows on all indicators including a very oversold reading on the stochastics tonights.

Like gold, crude continues to act healthy pulling back off overbought levels.  I will exit my position entered at 37.84 if $USO breaks the 10 day low which is represented here by the lower purple channel.

I talked after the Alcoa $AA earnings about the large inverse head and shoulders there having been broken to the upside and the possibility of a melt up.  The earnings number reaction both here and in Intel $INTC have been very telling.  We’ve seen large gaps up, followed by the issues giving up their gains and moving lower over the next few trading days.  This is not healthy action as it shows investors are not willing to believe in the momentum, rather they are taking profits on the good news.

If this rally has ended, I will look back on the Alcoa earnings action as being a huge red herring.  If that had been a breakaway gap I believe we would have melted up.

By the way, First Solar $FLSR, the last holdout of the solar sector gave up the ghost after the close plummeting 15% on earnings investors obviously didn’t like.

Bottom line tonight, there are a lot of great risk reward trades on the long side, I’ll be going through my watch lists tonight in an attempt to identify them.  I believe that taking a shot to the long side on some strong issues is worth getting stopped out if we completely melt down.