I figured I would paste this article I wrote at Investools.com. These are generic summaries of what is going on in the market.

More softening economy reports plagued Wall Street today, along with downgrades and management shifts, which sent financial stocks into a tailspin. The Dow Jones Industrial Average bolstered a 134-point loss, finishing at 12,503, the NASDAQ removed 31 points from its collective total, closing at 2,491 and the S&P 500 undressed 14 points, ending at 1,385.

Reports from the Institute of Supply Management (ISM) showed that its manufacturing index reported a fourth straight monthly decline. The Department of Commerce reported the sixth drop in the last seven months in construction spending, which ties back to the housing market's contraction. Both reports pointed to continued economic struggles.

Financials
The credit crisis continues to weigh on the market. Wachovia and Washington Mutual endured management shifts earlier today. Not to mention Standard & Poor's downgrade on Merrill Lynch, Morgan Stanley and Lehman Brothers, which helped push the financial sector down. These reports, along with the sector's existing pessimistic outlook, hint towards more write-downs and deterioration in these stocks.

Over the last few weeks, banks and brokers journeyed back down to their relative lows. These lows look a lot less stable than they did the last few times they were tested. A couple weeks ago, I brought the $BKX on board to measure the group's weakness, and I used it to gauge today's price action, which brought about a significant breakdown (see Figure 1).

Figure 1 - A Breakdown in the $BKX

If you search through the group, you'll notice that many stocks are trading at or near their relative lows; e.g., brokers such as LEH, LM, CS and UBS or banks such as BAC, WM, WFC or IBN.

If weakness in this sector continues, bears will look for stocks that are headed towards these lows, but still have plenty of room to drop.

Energy
Energy stocks, in general, were the relative strength in the red sea today. Drillers, service and operation companies, equipment manufacturers, and others held up well during today's session. Coal stocks decided to re-emerge as a top-performing group, despite its sell-off over the last couple weeks. These stocks are more attractive to bulls, now that they are trading closer to support and have cheaper price tags.

Natural gas and producing stocks are the strongest bull markets around. Natural gas traded up 11¢ cents today, finishing at $12.07 per British thermal unit (Btu). As a result, natural gas companies held up well against the broad-based sell-off.

Refineries are heating up, which signals a possible contraction in the performance of energy stocks in the not-so-distant future. Keep a watch list of these stocks because they could be a leading indicator to a contraction in oil prices. A few more commonly known refineries include TSO, VLO, HOC, ALJ, FTO, HES and WNR. Western Refining (WNR) finished the day nearly 19 percent higher (see Figure 2).

Figure 2 - WNR Signaling a Potential Bottom in Oil-refining Stocks

Retail
It seems like reversal patterns are popping up all over in these stocks. For educational purposes, I will drill through the retail stocks, down to the "Teeny-Bopper Retail" group. This group includes companies such as Bebe Stores (BEBE), American Eagle Outfitters (AEO), Abercrombie & Fitch (ANF), Urban Outfitters (URBN), Aeropostale (ARO) and Buckle Stores (BKE). These are stores in which teenagers predominant the primary customer base. I recently visited these stores in my local shopping mall, and I found it interesting that they were packed, but there were no lines at the registers. For the last few months, a couple of these stores (BKE, URBN and ARO) helped push the retail sector higher. As of late, it seems like support levels are starting to fail, and others in this group are heading quickly towards their relative lows (see URBN's downtrending chart in Figure 3). Not to mention, there are a few topping formations taking place in several of these stocks.

Figure 3 - URBN Is Undergoing a Trend Change

It is hard to believe that the demand for $300 jeans will continue throughout the summer, despite BKE's strong earnings last week. If the market continues to head lower, keep an eye on these high-end retail companies that lack a diverse customer base.

Outlook
The averages have now established a series of mixed trading signals. From a technical perspective, you could reach different conclusions, depending on which average you analyze (see Figure 4).

Figure 4 - Three-month Thumbnail Charts of the Major Averages, Courtesy of Prophet.net

Looking at the Dow Jones (upper left), you'll see the group's steepest downward trend. The S&P (upper right) illustrates lower highs and lower lows, but not nearly as dramatic as the Dow. The NASDAQ (upper right) is merely trading sideways, while small-cap stocks represented by the Russell 2000 (lower left) continue trending upward. This conundrum raises a good question: What do you do when you receive mixed signals?

The broader market wins in this situation (S&P 500). While this trend is young and not very dramatic, it is still a greater sample of the market than the rest. From a technical perspective, keep an eye on the support level, which is hovering around 1,375. If pressures continue from ailing financial companies, higher oil prices and soft economic reports, it won't take much more for the market to move lower.

Homework
For today's homework assignment, closely examine how "exposed" your account is to the market's movement. As an example, log in to your paperMoney" account and go to the Monitor page. Here you can see all your positions simultaneously. Underneath your positions, you will see the Overall Totals column. These values will help you determine how diversified your portfolio is against the market.

For example, if you have three option positions, all of which are calls, then you will have a significantly positive delta. If your market posture is bearish, does this approach make sense? Aside from delta, also examine your gamma, theta and vega account totals. Think about your total account as one option contract, and decide if are you comfortable with the numbers.

Jeff Kohler
Investools Content Manager