MARKET FALLS HARD ON BAD BREADTH AND HEAVY VOLUME -- NYSE ADVANCE-LINE TURNS DOWN -- FINANCIALS AND SMALL CAPS LEAD THE WAY -- THE S&P 500 BREAKS ITS 50-DAY AVERAGE

FINANCIALS AND SMALL CAPS LED THE WAY ... Earlier today I showed heavy selling in the Russell 2000 iShares (IWM) and the Financials Select Sector SPDR (XLF). [Please see Market Message posted earlier today]. Unfortunately, things got worse as the day progressed. Chart 1 shows the IWM closing 2.8% lower and headed for a test of its 200-day average. Downside volume was very heavy -- as it was last week. Chart 2 shows the Financials Sector SPDR (XLF) falling 2.9% on heavy volume as well. Earlier in the day I wrote about the XLF headed for a test of crucial chart support (and a four-year support line) at its March low. It looks like that low is going to be severely challenged. Although brokerage stocks suffered the biggest losses (-3.7%), banks actually had a worse chart day.

Chart 1

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BANKS BREAK 2007 LOWS ... Brokerage stocks tumbled nearly 4% today and, in so doing, broke their 200-day moving average in pretty decisive action (Chart 3). Bad as that was, banks did even worse. Chart 4 shows the Bank Index falling below its March low to register a new 52-week low. Its 50-day average also crossed below the 200-day for the first time in nearly two years. That doesn't bode well for the rest of the financial sector. Once again, housing problems were at the heart of the problem. Homebuilders and REITs hit new lows again today. The day's biggest loser was Countrywide Financial.

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COUNTRYWIDE TUMBLES 11% ... Part of what unsettled the market today was an 11% plunge in Countrywide Financial. The weekly bars in Chart 5 show the big mortage lender falling to the lowest level since the fourth quarter of 2005. And it did so on very big volume. The stock's relative strength ratio has fallen to the lowest level in more than three years. Another big loser today in the industrial sector blamed its problems on weak housing.

Chart 5

DUPONT TUMBLES ... Another big loser today was Dupont. Chart 6 shows the big chemical maker tumbling more than 6% on huge volume. The stock appears headed for a test of its 200-day line. The weekly bars in Chart 7 show that Dupont had just recently exceeded its early 2005 high near 51. Today's high volume drop below 50 puts that upside breakout in doubt. The next test of important support will come near the 48 level. Dupont blamed part of its earning's shortfall on a weak housing market.

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NYSE ADVANCE DECLINE LINE TURNS DOWN ... Last week I wrote about the deterioration in several market breadth figures -- including the NYSE Advance-Decline line. Today's breadth figures signal a potential top in that key breadth indicator. Market breadth was decidedly negative today. NYSE decliners numbered 2996 versus 338 advancers for a negative breadth ratio of close to ten to one. That was enough to push the NYAD line to the lowest level in three months as shown in Chart 8. Chart 9 shows that today's breakdown puts the NYAD line well below its 50-day average for the first time since last July. That increases the odds for further downside correction in the broader market.

Chart 8

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S&P 500 BREAKS ITS 50-DAY LINE ... Speaking of 50-day lines, the S&P 500 and the NYSE Composite followed the lead of small and midsize stocks today and closed below that initial support line. Chart 10 shows that today's 2% selloff in the S&P 500 took place on the heaviest volume this month. That makes for three big-volume selloffs in the last week. The daily MACD line (which failed to confirm the price high) turned negative today. All of those factors increase the odds for a retest of the June low near 1484. We'll have to see what happens from there. The only markets that gained ground today were bonds and gold. Bonds on a flight to safety from falling stocks. Gold on a falling dollar.

Chart 10