Good morning traders,

For many, many weeks, the pattern has been that every dip is bought.  Every selloff finds ready buyers, and, so, there has been a complete lack of downside momentum on any decline.  It is difficult to read a market that is consolidating sideways on low volume, so both bulls and bears are watching for a break of this pattern.

This morning, we find world equity markets marked sharply lower.  Asia is mixed (S Korea – 3%, Hong Kong -2.5%, China broad market +2.5%), but all of Europe is in the red with the average decline close to 2%.  South Pacific markets were hit particularly hard, with markets in the region down nearly 3%.

As would be expected, the US Dollar is strong this morning, probably reflecting a flight to quality mindset.  We are seeing reasonably strong downmoves, for instance, in EURUSD, AUDUSD and NZDUSD, with corresponding strength in USDJPY, etc.

Note that Gold and precious metals are actually down this morning.  This may be an illustration of the claim I have made in my morning Waverly Reports for many months — Gold now trades as a risky asset just like any other commodity, and this shift has eroded its traditional place as a store of value.  Most likely, this is not a permanent change, but it is the world we live in today, so do not naively assume that Gold will be strong in a time of crisis.

Energy is slightly flat this morning, Chicago grains are down a bit in early trading, and most New York Softs are trading up.

Today has the potential to be different.  This is one of the days that has a setup that really could develop into a more serious decline, so be careful of buying the dip.  Aggressive traders may wish to do so (it has been the right thing to do for many days), but acknowledge the downside potential as well–be very quick to admit you are long lest you find yourself 5-10 points out of the money on S&P futures very quickly.  It also makes sense to be prepared to pursue the downside aggressively, but it is important to remember that there has been no followthrough for many weeks.  If you position short and see no conviction, it may be the “same old …” so, again, be quick to admit you are wrong.  In terms of sector plays, Energy, Financials and Tech should be attractive, while Industrials remain longer-term candidates for some good buys.

1,310 on the futures, which was touched in early trading, is a good inflection point to watch, with probably another 10 handles of “easy” downside below.  Remember, higher timeframe patterns are generally constructive for longs, so make sure to think of any decline in the proper context.

Be flexible and be nimble today.  Expect nothing and focus on managing the risk.  Good hunting!