MARKET INDEXES BREAK MORE SUPPORT LEVELS AS VOLATILITY RISES -- SO DOES THE PUT/CALL RATIO -- RISING YEN SIGNALS MOVE TO LOWER RISK -- CRUDE OIL IS FALLING ALONG WITH STOCKS

NASDAS 100 VIOLATES 50-DAY AVERAGE AS VOLATILITY RISES... I wrote yesterday that rising volatility measures for the Nasdaq (VXN) and the S&P 500 (VIX) were starting to rally which would be bearish for stocks. I also showed the Nasdaq 100 threatening to break its 50-day moving average. Chart 1 shows the Power Shares QQQ Trust (QQQQ) doing that today on rising volume. In fact, the Nasdaq 100 fell -2.5% today which made the day's weakest index. It's never a good sign when the market's strongest group (technology) issues a short-term sell signal. Volatility indexes rose as stocks fell. The purple line in Chart 1 shows the Nasdaq Volatility Index (NDX) jumping 7% today. The CBOE Volatility (VIX) Index (not shown here) jumped a similar amount. Rising volatility contributed to more stock selling as support levels were broken.

Chart 1

S&P BREAKS SUPPORT LEVELS... Today's 17 point drop in the S&P 500 pushed it below the rising "neckline" drawn below the May/June lows as shown in the hourly bar chart in Chart 2. A close below 878 would confirm that downturn. [The Dow has already broken its May low]. The S&P 500 also closed back below its falling 200-day moving average. A downside target from the H&S top is to its mid-April low near 826 which falls in between the 38% to 50% retracement that I've written about before.

Chart 2

Chart 3

OPTIONS TRADERS ARE TURNING MORE BEARISH... Volatility isn't the only contrary indicator that's rising on the CBOE. So is the CBOE Options Total Put/Call ratio (CPC). A falling put/call ratio implies that traders are buying more calls (bullish) than puts (bearish). A rising ratio, however, implies that traders are worried about a market downturn and are buying more puts as bearish protection. The blue line in the next chart is a 5-day average of the CBOE put/call ratio. Notice that peaks in the ratio in November, January, and March were followed by market bounces. Bottoms in the ratio coincided with market peaks in early January and mid-February. The chart below shows the 5-day average of the CPC having broken a resistance line extending back to March (when the last rally began). That's a sign that options traders have turned more bearish.

Chart 4

SAFE HAVEN BUYING OF YEN ... The Japanese yen has been a contrary barometer of risk tolerance in financial markets. A falling yen shows more risk tolerance. Chart 5 shows, for example, that the Japanese Yen Currency iShares (FXY) peaked in March as the global stock rally started. Over the last month, however, the FXY has moved up toward a "neckline" drawn over its March/May highs. That suggests that some safe haven money is buying yen. Another sign of the recent buying of yen is seen in the recent upturn in the Yen/Euro cross shown in Chart 6. As global funds have started moving out of the Euro and most other foreign currencies, some of it has moved into the U.S. Dollar. More of it is moving into the Japanese yen. That's a sign that global traders have become more risk averse over the last month and are turning more defensive. We see that same tendency in recent buying of U.S Treasury bonds, consumer staples, and healthcare stocks and the selling of materials, energy, and consumer discretionary stocks.

Chart 5

Chart 6

THE CFTC SHOULD STUDY SOME CHARTS... Given the close correlation between crude oil and the stock market this year, it's no surprise to see them falling together. The daily bars in Chart 7 shows crude oil falling $1.61 (-2.5%) today to break its 50-day average (blue circle) for the first time since early March. The solid line is the S&P 500. The close correlation between the two lines is obvious. Both bottomed together in March and peaked in mid-June. I point this out because of today's report that the CFTC in Washington is considering imposing tighter restrictions on commodity traders. The CFTC commissioner on CNBC today said he was particularly concerned that the recent runup in oil wasn't based on any fundamental rationale and may have been due to excessive speculation. Someone should show him this chart and explain that crude oil ran up with stocks on hopes for an economic recovery and are now falling together. It's truly scary to realize that people in Washington making market regulations don't understand how the markets work. The solid line in Chart 8 shows the Energy SPDR (XLE) dropping much harder than oil over the last month. The XLE/SPX ratio at the bottom of the chart show energy stocks leading the rest of the market lower. Apparently, traders in energy stocks saw the drop in energy coming a bit earlier than commodity traders. Someone should show that chart to the CFTC as well.

Chart 7

Chart 8