STOCKS DECLINE ACROSS THE BOARD -- FINANCIALS LEAD LOWER -- XLY BACKS OFF RESISTANCE -- S&P 500 AND DOW BREAK WEDGE SUPPORT -- NY COMPOSITE BREAKS TRIANGLE SUPPORT -- BONDS SURGE IN FLIGHT TO SAFETY

BROAD SELLING RATTLES WALL STREET... Today's Market Message was written by Arthur Hill. John Murphy will return next week. - Editor

Stocks were broadly lower on Thursday. The major market indices were all down around 3% with remarkably equal declines. Usually, the Nasdaq (techs) and Russell 2000 (small-caps) will pace the decline with larger losses. This was not the case on Thursday. The S&P 500 lost 2.99%, the Dow lost 2.99%, the Russell 2000 lost 3.14% and the Nasdaq lost 3.20%. Selling pressure was relatively even across the board. All nine sectors were lower with six of the nine losing 2.2% or more. Chart 1 shows the Financials SPDR (XLF) leading the way lower with a decline exceeding 4%. XLF remains well above its August lows, but is caught in a trading range with support around 20 and resistance around 23. A break below the August lows would be bearish. Chart 2 shows the Consumer Staples SPDR (XLP) holding up the best with the smallest loss on the day.

Chart 1

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XLY HITS RESISTANCE AT 200-DAY... Chart 3 shows the Consumer Discretionary SPDR (XLY) meeting resistance at its 200-day moving average over the last four weeks. The ETF broke the July trend line with a sharp decline in mid August, but rebounded for another resistance challenge over the last two weeks. With indecision on Tuesday-Wednesday and a long red candlestick on Thursday, it looks like resistance is going to hold. The August lows mark support and a break below these levels would argue for a test of the July lows or even a move to new lows. This chart shows characteristics similar to the S&P 500 and Dow just before their support breaks today (see below).

Chart 3

WEDGE SUPPORT LEVELS BROKEN... John Murphy and I have been talking about rising wedges lately. With today's sharp decline, a number of stocks, ETFs and indices broke rising wedge support levels. First, let's review a little background. The rising wedge typically forms a corrective pattern that retraces a portion of the prior decline. This retracement is often between 38% and 62%, two numbers based on the golden ratio (1.618). As a corrective move, the advance is expected to form a lower high and the subsequent breakdown signals a continuation of the prior decline.

The next three charts show the Dow Industrials, S&P 500 and the Industrials SPDR (XLI) with rising wedge breakdowns. The Fibonacci Retracements Tool is overlaid with the gray horizontal lines. Notice that all three peaked in the 38% to 62% zone. With the first decline in August, all three broke the lower trend line of the rising wedges. There was a bounce at the end of the August and all three met resistance near their mid-August highs. With a sharp decline over the last three days, all three broke below their August lows and the rising wedge is rising no more. The trend has clearly reversed to signal a continuation of the prior decline. I will show some long-term charts tomorrow to provide some downside targets.

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NY COMPOSITE BREAKS JULY LOW... Chart 7 shows the NY Composite breaking triangle support and moving below its July low. The index appeared to break the upper trend line of the triangle, but this breakout failed to hold and today's break looks convincing. In addition, the index is one of the first to break its July lows and record a new low for the 2008. The next charts show similar patterns at work for three stocks. Each chart shows a sharp decline followed by a triangle consolidation. Chart 8 shows Caterpillar (CAT) breaking triangle support with a gap and sharp decline today. Chart 9 shows Deere (DE) breaking triangle support with a sharp decline today. Chart 10 shows Boeing (BA) on the verge of breaking support.

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BONDS SURGE IN FLIGHT TO QUALITY... With stocks falling sharply, money moved into bonds in a flight to safety. Chart 12 shows the iShares 20+ Year Bond ETF (TLT) moving above 95 with its third advance in as many days. In addition to a flight to safety, money moved into bonds after the Labor Department reported 15,000 new applications for unemployment insurance. Weakness in the job market ahead of Friday's employment report spurred the bonds bulls into action. Remember, rates fall when bonds rise. Weakness in the job market and the economy increases the chances of lower rates from the Fed. This prompted the rise in bonds and the fall in interest rates. Also notice that bonds have been rising since mid June. There was a sharp pullback in mid July when stocks surged, but the bond advance continued as TLT moved from 89.5 to 95.5 (low to high) over the last six weeks. This is a huge move for bonds, and interest rates for that matter. Chart 13 shows that the 10-Year Note Yield ($TNX) falling from 4.15% (41.5) to 3.64% (36.43) over the last six weeks. This sharp drop in interest rates could explain relative strength in financial and home-building stocks over the last few weeks. However, the sharp drop also points to economic weakness, which is not good for stocks.

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