The holiday shortened week began with another broad market sell-off which was partly inspired by a Goldman Sachs analyst downgrading Citigroup (C) to a sell. The S&P 500 (^SPC) closed at its lowest level since August 28, and in so doing took out the previous Monday's low. By contrast the Nasdaq Composite (^IXIC) managed a close just above the corresponding close of the previous week. The index came to rest at the 200-day EMA and an area of chart support.

Action in overseas markets may inspire a short covering rally in today's session and I could envisage another strong upward trend day as we saw exactly one week ago. The Nikkei 225 in Japan (^N225) suffered through most of today's session but in afternoon trading the index suddenly found a burst of buying support which rescued the index from a new 52-week low below 15000. A similar late burst of buying brought the Hang Seng (^HSI) back to close with a more than one percent gain.

It is worth commenting on the sorry performance of the UK's FTSE in yesterday's trading as it outstripped all global indices on the downside to register a 2.7% loss. The lamentable handling of the crisis facing the bank by the UK government which has exposed the UK taxpayer to a theoretical liability in excess of $80 billion weighed heavily on sentiment. It has helped to push the Libor rate on sterling up to spreads above the base rate not seen since the summer. Shares in Northern Rock continue to plunge and have had to be suspended periodically in today's trading and the plight of the bank was not helped when news also emerged this morning that another mortage originator, Paragon is becoming dysfunctional.

Despite a temporary respite in broad market selling, which is enabling the FTSE to register small gains as this is being written, the underlying disarray in the financial sector will add further pressure on the recalcitrant governor of the Bank of England to be more accommodating on interest rates. Especially in relation to the euro, this cannot be constructive for the sterling cross-rates.



Last week I mentioned the deterioration in the technical conditon of the sector fund, XLB, which comprises many suppliers of industrial materials. The fund dropped a further 2.6% yesterday and closed below the 200-day EMA.



Just when it seemed that sentiment for the banking sector could not get a lot worse the sell recommendation on Citigroup along with concerns that the guarantors of structured financial products such as MBIA are facing an imminent credit downgrade pushed the banking index to another new multi-year low in trading yesterday.

The BKX index is at levels not seen since 2003 and continues to undermine the bullish outlook for equities. It is naive to believe that the so called real economy which focuses on the global trading in physical goods and manufacturing can stand aloof from the turmoil facing the financial economy.

Anecdotally however, one has the sense that too many hedge funds have succumbed to the temptation to settle too comfortably into a dire outlook. This creates the preconditions for another dramatic short squeeze induced rally and its imminent likelihood will be strengthened by the desire for a "feel-good" rally before the festivities later in the week.



Brush Engineered Materials (BW), featured here recently, has an interesting pattern that shows a bearish flag formation that morphed into a descending wedge. The stock delivered an almost six percent return on the short side in yesterday's session.



Spectrum Brands (SPC) looked as though it was heading towards $6 a week ago and the pullback since has been on subdued volume. If the overall market cooperates the $6 target could be on the cards again.



Investors in Excel Maritime (EXM) have been on a very exciting ride since early September. The roller coaster moved relentlessly upwards during October but the stock has now been cut in half in the last month and has returned to the July levels that coincide with the 200-day EMA.



Clive Corcoran is the publisher of TradeWithForm.com, which provides daily analysis and commentary on the US stock market. He specializes in market neutral investing and and is currently working on a book about the benefits of trading with long/short strategies, which is scheduled for publication later this year.

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