Stocks were crushed, Tuesday, after a meltdown in Asian markets led by the Shanghai index closing lower by 8.8% and a weak durable goods number. The Shanghai index shed almost 9% offering up its worst selloff in over 10 years. This selloff in China, which has been the leading market index the past two years, spilled over to world financial markets and had a devastating effect on ours as well. That combined with durable goods coming in 7.8% lower and missing expectations of 2.2% sent our indexes lower with the worst one day loss in four years.

At the close, the Nasdaq led the way to the downside, with a 3.9% loss, the SP 500 and SP 600 both closed lower by 3.5%, and the DJIA fell 3.3%. The DJIA was down at one point today by 546 points. That was the worst one day loss since 9/17/01. So the DJIA down 416 points is really a blessing, if you compare it to what could have happened after those sell orders hit this market. The worst news came from leading stocks. The IBD 100 fell 5.8%, easily outpacing the broad market. Leading stocks leading this much to the downside is very bearish. This is horrible action and is something to pay attention to, if you refuse to take some stock in. The fact that ALL of the major indexes are ALL trending below their 50 day moving averages should also cause you some real concern. The fact that all are below this line is something you need to pay attention to. The best rallies do not happen with these indexes ALL under their 50 dma. This was the first time the SP 500 has been under the 50 dma since August 15th.

The SOX index also lost 3% today, erasing all of the previous gains it had last week. However, that was not the worst area of the market, as Steel, Metal, Solar, and Chinese stocks got drilled. The Steel-Specialty Alloy group tanked 7.8%, the Steel-Producers lost 7%, the Metal Ores lost 7%, and Energy-Other (Solar) lost 6%. The biggest hit chinese stocks were ACH (down 14%), MR and HMIN (down 13%), CHL (down 10%), and EDU (down 8%). This is where the blood was today.

All of the 197 industry groups in IBD were in the red by the end of the day, only 3 out of 500 SP 500 stocks finished in the green, only 8 out of my 282 longs (now down to 230) were green, and all 30 DJIA stocks were in the red. This was about as ugly of a day as you can get.

Volume was much higher on the NYSE and the Nasdaq. The volume on the NYSE (I can not confirm this) is supposed to be a record for the highest total ever (I got this from IBD). The extremely huge increase in volume along with the horrible losses gave a clear distribution day. In my brain, you might as well call this two distribution days, as it was that bad from my perspective. To go along with the huge distribution in the indexes, breadth was horrible. Breadth was negative on both the NYSE and the Nasdaq by a large margin. Decliners beat advancers by around an 8-to-1 margin on the NYSE and decliners beat advancers by around a 13-to-2 margin on the Nasdaq. This was some of the worst breadth and selling since 1987.

Today is the day I have been waiting for for at least a month and a half now. I have been warning everyone of all the problems with this bull market since early January and it has now come to prove to us that everything we were troubled with was in fact worth being troubled over. A 215% gain in China in 20 months is simply impossible to maintain. This was the most picture perfect bubble since the DJIA ‘28-’29 and the Nasdaq ‘99-’00 markets. After such a parabolic run this was obviously going to happen sometime soon. I had a feeling it would be soon, based on the current Shanghai chart and I was proven correct. All three charts simply looked exactly the same on the 20 month run-up leading to a selloff.

To me, this four year rally, is officially over. All of the gains for 2007 were given back in one day today. All of the climax runs in individual stocks recently, with all the poor quality new long candidates, with the bubble in China, and the low VIX with poor returns on longs in our bull market all signaled that the rally was getting near the peak. And it looks like today we have that peak, for now. Protecting profits is now the new game in town. The game was the same since July/August–try to make as much money as possible on longs that are breaking out from solid chart patterns. The game now is to not buy stocks and instead to protect the profits you already have and accrued during this run. Today’s selloff was so extreme, after such a sedated, boring, low VIX rally that the bull market has to be called off.

Tons of stocks I am holding on to that are still above their key important support lines are not as pretty as they once were. Many stocks that I own that are holding above support are doing so by only a small amount and their chart patterns look a lot more messy than they did before today. There are very few pretty charts with tons of max green BOP left out there after today. The ones that are out there may still have max green BOP but the price declines are starting to overshadow that. Price and volume action is way more important than a chart staying green. I don’t care if the chart is green, if my stock is down 20% (LMRA I am looking at you).

It may be months (at least 2 to 3) before the stock charts get pretty again. But while most people lose money trading this market, we will be in cash or getting ready to go short stocks if the trend continues to the downside. Selling stocks that are breaking down now is a lot more smart than “hoping” and “wishing” for a bounce. A bounce can be expected in a bull market. Panic selling then is very silly. However, panic selling in a bear market off the first big down day normally pays off much more than holding on and “hoping” for a rally. The one thing you should take comfort in, no matter what, is the fact that while there will be some dumb dip-buying in the coming days based on a “gamble” that the market will bounce, we will not be dumb enough to play this game and will instead be on the sidelines enjoying the upcoming extremely wild and choppy trading that is about to take hold.

There are two interesting statistics I saw today that indicate that we may have seen a peak in the selling based on levels of fear. The ARMS index hit a 10 today; those are levels that have not been seen since the 1987 crash. That shows there was some extreme panic driven selling going on today. And trust me I saw it in the chat rooms I monitor. Some people went very long stock the past couple of weeks and were handed a major whooping today. The other number that jumped at me was the IBD put/call number. The put/call ratio jumped to 1.49. I believe that is the highest level I have seen in over a year, at least. Most of the time these numbers are all very bullish. But normally you see these numbers after a major selloff. The put/call was already high coming into today and history shows that high numbers on this index work best AFTER a bear market. These contrarian numbers have a much lower reliability in bull markets. So the high ARMS and put/call numbers could just be noise. The fact is we simply do not know. But these numbers are something to keep in mind, if we see buying come into the market. However, if the market continues to selloff, don’t blame the put/call or the ARMS index; you should be paying attention to price and volume. Not these secondary indicators.

Speaking of secondary indicators, the VIX had a huge 64%!!!! jump to the 18 area. That was about the only positive I could draw on a day like today as a higher VIX will help us make more money the next time the market decides to rally. This whole rally from the June lows in the DJIA produced only 180 stocks up 100% or more. That simply makes this the worst bull market I was ever a part of. Normal bulls, I have said over and over, produce 500-1000 during a run like we saw on the indexes. A VIX around 20 or 30 when the next bull market starts would definitely give us many more 200-500% gains; instead of the 50-100% gains we got during this last bull run.

I saw today that the chances on the fed futures market of a rate decrease the next meeting rose to around 70%. I see that some see this as positive. I hate to burst your bubble people but the last thing you want to see is stocks selling off and the Fed cutting rates. Why? Because that is as clear as anything the fed could say about the economy. By cutting rates, they are telling you that the economy has slowed down and that they need to fix it. They wouldn’t need to cut rates, if the economy was on fire. So don’t take this talk as bullish, like most amateurs do. The fed KNOWS there is real weakness when they cut rates. That is why they cut them.

This market has definitely left a lot of traders confused. Some believe they should buy the dip since every buy-the-dip trade has worked since 2003. However, this dip has a totally different feel to it. I can only hope that you can see the difference, this time. There may be a bounce but off of this much selling, trust me, I would not expect it to last long. If we do recapture all-time highs, that would be extremely bullish, unless it is on lower volume. That would be really ugly divergence. Anyways, once again, even if we do rally my charts are ugly now. Ugly charts simply DO NOT make substantial gains. Pretty charts make BIG GAINS. Ugly charts reverse and go lower.

Raise cash, only hold stocks acting perfectly (like nothing is wrong with the market at all), keep new buys extremely small if you are an experienced investor, and do not go long right now if you are a newbie. If you don’t know if you are a newbie, then you are a newbie. Unless you have clear cut loss or sell signals, do not sell out your stock completely. The fact that your strong stock is showing strength in a bad market says a LOT. The one thing I am extremely sure of is that all traders should get off margin on your long positions.

We shall see what happens tomorrow. I bet on some stability but we will see what we get in China tonight.

Resistance and cash are king!! Aloha and I will see you in the chat room.