Today’s price action has been highly negative because the Down gave up a large intraday gain to settle for a loss. Such price action often means a more significant top so in the context of our intermediate rally from the November bottom, we may, experience another similar day on Thursday, but with probabilities stacked that the Friday or several days later, a sharp sell-off may ensue.

If so, how much lower could we plunge?

Given that the equities have been trading in a rather technical manner,  we could retrace back down to 12,900 on the Dow down into the indicated region on the graph above.

The 60-minute daily chart confirms the downtrend probability on the momentum with a support level at around 13,000.

If we are looking for culprits to take us lower, than tomorrow’s retail sales number, jobless claims and business inventories may suffice.

Folks are particularly worried about any substantial rise in business inventories because that is a drag on sales, future production and future jobs. Inventories come out at 10, so more meaningful fireworks could occur after that report.

In fact, the reversal in the equities today could have been predicated on a bad inventory number or why else would Fed come out today with more of the stimulus force.

Friday’s PMI report could simply validate any bad inventory number.

This scenario takes us to the issue of how long will a sell-off last?

Well, if we take the June-August price action as the model, than the tremors that maybe ahead of us could last for 4-5 days, which takes us through much of the next week. Only by Wednesday we get a chance at some decent numbers when housing starts get their update.

Keeping some ready cash on the side is a good idea and deploying it once the dust settles is swell as well.

Things that should be looked at that point are Ebay, IP or Visa (V) in case it sells off on sympathy from any bad earnings from Discover (DFS) next week.

Multiple time frame charts on the Dow maybe signaling a decent 200 point rally in next several days as the prices attempt to consolidate the 13,000 level and decide which way to go.

A look at the 15-minute and 60-minute chart patterns suggest two different price dynamics with the 15-minute chart attempting to digest the 13,000 level while the 60-minute one suggesting an unbroken upward bias as of this morning (and all this is subject to change).

Politician’s can, of course, skew all these upwards probabilities into downward ones very quickly particularly on a day before the weekend, typically the time when politicians do, indeed, tailspin the markets.

Of note is that the political jawboning is having less of an impact as each successive comment they make tailspins the Dow by smaller amounts. Still, the fact that politicians publicly whine whenever they don’t get it their way acts as a ceiling on the equities and prompts selling on any move higher.

Citigroup (C) is of particular note as it is carving out a textbook bullish flag in the $34-36 range which can present a good longer term entry point as well as a good trade.

The gently sloping downward relative strength and momentum suggest that it still has some consolidating to do with a potential for a nasty drop into $31 on very bad day but any upswing in the momentum reading could move the big C into a $41 range rather quickly.

The day after the Thanksgiving is traditionally a negative day with outcomes that, as in some past times, all the pre holiday gains get erased. The fact that the Dow dropped less than 50 points can be viewed as a positive given the monster rally last week.

Again, though, absence of major news stalls the market although some of the news, from the Chicago and Dallas Fed, were rather gloomy.

Chicago Fed National Activity Index (NAI) tanked down to -0.56, only few hundredths of points away from a level considered recessionary.

“Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to –0.56 in October from 0.00 in September. All four broad categories of indicators that make up the index decreased from September, and only two made positive contributions to the index in October,” reads the gloomy lead-in statement.

Dallas Fed’s Texas manufacturing survey was equally gloomy.

“Indexes reflecting future business conditions fell sharply in November. The index of future general business activity plunged from 16.8 to -5.3, its lowest reading in four months. The index of future company outlook dropped from 20.9 to 1.8. Indexes for future manufacturing activity also fell this month but remained positive,” reads the forward-looking indicator of that index.

Despite such bad reading, hence, gratefulness the drop was only in the 40s on the Dow.

Tomorrow, however, a slew of market-moving data will come out – Durable goods, Case-Shiller index, Consumer confidence, FHFA house prices – and two names to watch are Ebay and Lennar (LEN).

These two favs have similar charts and what we need to see tomorrow is upward action of these two names: for Ebay to continue its super-strong move it made today and for LEN to finally break through the $39 barrier so it can move higher.

A good consumer confidence number may move Ebay higher while FHFA house price could impact LEN. New home sales number due on Wednesday could further impact LEN.

Finally, tomorrow we will hear great deal from the Fed luminaries with 5 of them in some jawboning action of whom the words of Benny at the College Fed Challenge may carry most weight – and if he says anything meaningful it typically moves equities down.

Mark Hulbert says that the insider sell-to-buy ratio is low and it points to an “imminent” rally.

“For the week that ended last Friday, this sell-to-buy ratio stood at 1.58 to 1, which is less than half the average level over the last decade of 3.4 to 1,” writes Hulbert.

At the market high this fall, the ratio was at 6.86 to 1.

The astronomy community was abuzz this past week about the spectacular northern lights, sparked by a massive geomagnetic storm, produced by the sun on Tuesday and Wednesday.

According to the NOAA, the geomagnetic storm measured as a Kp-index reached its height on Wednesday, November 14. The chart below displays the data from the NOAA showing the geomagnetic storm activity in the 15-minute increments.

Geomagnetic storm of this week’s magnitude could cause “minor impact on satellite operations” or “transformer damage” but a large body of work also demonstrates that these solar storms have negative effects on human psychology so that higher the storm levels the more pessimistic and negative perception and sentiment predominates among people.

Numerous studies have shown that the elevated geomagnetic storm activity is strongly associated with depression and destructive behavior. A paper by University of Melbourne scientists has a succinct discussion on the psychological dimension of these solar effects.

One spillover of these depressive psychological moods is into the stock market.

According to the 2003 Atlanta Fed study, there is a  “strong empirical support in favor of a geomagnetic–storm effect in stock returns after controlling for market seasonals and other environmental and behavioral factors. Unusually high levels of geomagnetic activity have a negative, statistically and economically significant effect on the following week’s stock returns for all US stock market indices.”

In other word, high solar storm means stock sell-off… and this week seems to fit that bill: on Tuesday, but particularly on Wednesday during the peak of the solar storm, stocks tanked big with selling pressure continuing on Thursday.

Coincidence?

“Furthermore, we find that the GMS effect in stock returns is related to stock size, small capitalization stocks being affected by GMS more than large capitalization stocks. This latter result is consistent with the empirical finding that institutional ownership is positively correlated with stock capitalization, small cap stocks being held mostly by individuals,” says Atlanta Fed.

The chart above tracks the performance of 2 ETFs, the iShares Core S&P Small-Cap ETF (IJR) and the Dow Jones Industrial Average (DJI). It is noticeable that during this past solar-storm week, the small-cap IJR consistently led the large cap DOW in its declines.

“Since investment decisions of individual investors are more likely to be affected by emotions and mood than those of institutional investors who trade and rebalance their portfolio using a specified set of rules, the GMS effect should be more pronounced in the pricing of smaller cap stocks,” says the Atlanta Fed.

None of this sun-spot stuff does not expalian the previous week’s selling, of course.

On the web:
- Playing the Field: Geomagnetic Storms and the Stock Market, Anna Krivelyova, Boston College Cesare Robotti, Federal Reserve Bank of Atlanta.

- Do Ambient Electromagnetic Fields Affect Behaviour? A Demonstration of the Relationship Between Geomagnetic Storm Activity and Suicide, by Michael Berk, Seetal Dodd, and Margaret Henry, University of Melbourne.

The collapse in the major equities trend line, set back in October 2011, coincides with, potentially, another change in the financial trend – that of the interest rates.

The TNX index of the 10-year Treasury looks like it is at the cusp where it is to decide whether it wants to align itself with its traditional indices like the equities and the dollar, or would plunge lower on fear.

Citigroup gives us some glimpse at the future with a report that the FX markets are suggestive of higher rates sometimes in 2013.

“Does the market really believe that the 2015 Fed is going to be constrained by the 2012 Fed? The answer is ‘no,’” says Steven Englander, Citigroup’s New York-based global head of G-10 strategy.

CEO of ING Investment Management concurs.

“Mid-year, the market might start pricing in an earlier exit by the Fed because the private sector is actually rebounding,” Christine Hurtsellers of ING Investment Management.

In the latest Fed minutes, however, FOMC members are claiming otherwise suggesting that more bond-buying is ahead of us.

If “unemployment rate gets below 7 percent, you could have a Taylor Rule that suggests rates should go up and the question becomes do they overturn the Taylor Rule?” says Englander.

Than we have the fiscal cliff which will be resolved, one way or another, in favor of higher taxes on capital gains meaning that an alternative to stock-buying becomes more favorable tax alternative. If so, the market has to sort out which stocks to stick with, and this means a different equities trend line.

Nor is it clear how much of cash that would have otherwise gone into stocks goes, in post-cliff times, to other things some of which, if any, into  job-creating investment – and this is another reason why rates could be in the process of deciding which way to go.

So far, than, the only support for a suspicion that interest rates are headed higher is what Citi says about the FX and little-bit of a pattern playing on the charts although, as pointed here, the great confusion as to what is going on in the markets is itself a sign that some major realignment in equities is taking place.

However, if rates are to indeed go higher and realign with the equities and the dollar, things like commodities, red-hot dividend names and bonds could have, to say the least, some tough times ahead.

The Dow has pierced through another important technical level and is hanging around, as it was noted on this blog last week, into a zone of real scare – a technical area where it is easy to expect a full drop down to 12,000 touched in June.

Besides being a zone of scare, the area below 12,650 also has lot of support, as seen on the daily chart below.

At these levels, moreover, both the relative strength and momentum indicator have both entered the highly oversold territory and have completed the oversold loop. If one could draw any hope from this is that the Dow is at a higher level now than in June.

Weekly chart, however, is more problematic from the technical standpoint because the significant weekly highs dating back to May of 2011 have been achieved on lower momentum readings – a very bearish divergence which, if it decides to clear, could last for weeks on end and produce a humongous drop in equity prices. What happens this week, therefore, could either set the stage for that or prolong it for another loop higher on the weekly so that the right shoulder could be formed before the fall.

Meanwhile, it should be noted that the recent fall in the equities has paralleled a rise in the dollar. Today’s Fed minutes may be a news item that could turn this bullish dollar bets the other was as a “number” of Fed officials think that more bond buying will be needed once the “operation twist” ends in December.

Bottom line is that the equities need to inflict a real scare into the market and today’s action is closer to achieving that. The charts in this post are only a rough guide as to what are some possible scenarios but once we get there it is always important to re-evaluate what is going on.

With a convincing break through the 13,840 on the Dow, stocks are set to dive lower towards 13,500 mark and inflict a severe scare and a speculative search for the causes of the sell-off.

With the momentum (MACD) in a free fall the relative strength measure (RSI) is the other significant indicator that is yet to “correct” and for that to happen we need another “flush” down towards the 12,500 that has major support dating 3 times prior.

If we are to witness a huge drop in the stocks today, a good place to start looking are names that are not dropping as significantly or are coming back from those lows. Identifying such names and asking why are investors snapping them while the market is tanking would be a good start to identify sectors that may lead forward.