PLUNGE IN CHINA CAUSES GLOBAL SELLOFF AND MOVE INTO TREASURIES -- DOW AND S&P 500 ARE TRADING BELOW 50-DAY AVERAGES

CHINA PLUNGE PUNISHES EMERGING MARKETS ... A 9% plunge in the Chinese stock market has caused a global stock selloff and a continuing shift to the safety of Treasury bonds. Chart 1 shows Chinese iShares (FXI) gapping down below its 50-day moving average on very heavy volume. The day's biggest losses are coming from Asian markets (ex-Japan) and emerging markets in general. Chart 2 shows Emerging Market iShares (EEM) falling below its 50-day line on heavy volume.

Chart 1

Chart 2

BOND PRICES JUMP ALONG WITH JAPANESE YEN ... Treasury bonds are the principal beneficiary of falling stock prices. Chart 3 shows the 7-10 year T-note Treasury iShares (IEF) surging to a new 2007 high. That's weakening the U.S. dollar. The strongest foreign currency of the day is the Japanese yen which is trading at a new six-week high (Chart 4). That's helping to support Japan iShares, which are holding up relatively well. Although the Nikkie fell overnight, it was the only major market to lose less than 1%. Commodity producers are being hurt by the Chinese fall. That's especially true of aluminum and copper producers. China is the biggest user of those commodities.

Chart 3

Chart 4

DOW AND S&P 500 ARE TRADING UNDER 50-DAY LINES ... At midday, the Dow and the S&P 500 are trading beneath their 50-day moving averages. That's a serious caution flag for the market. Both indexes are also breaking intial support levels at their mid-February lows. Today's close will be especially important. A decisive close below those support lines (and especially on heavy volume) would constitute the first short-term sell signal in more than six months. We'll survey the potential chart damage after the market closes today.

Chart 5

Chart 6