As I wrote in my previous post, investors were just buying a pure wishful thinking, hoping for better times, improvement and trying to avoid recession (in their thoughts). Although some data from US came better than expected, they weren’t strong enough to offset bad data from Europe.

So watch the European debt crisis, since it will drive markets in the near future.

The debt crisis in Europe is “all that anybody cares about,” said Dan Greenhaus, chief global strategist at brokerage firm BTIG. “The worst-case scenario is a disintegration of the European banking sector.”

Concerns about government debt problems in Europe intensified in the third quarter. Investors are afraid that Greece could default on its debts, setting off a banking crisis similar to the one that occurred after Lehman Brothers collapsed in 2008.

In addition, economic activity in the United States and around the world has slowed. The Federal Reserve and the International Monetary Fund both warned of increasing risks to the global economic recovery.

“It’s been a very uncomfortable quarter for investors as news from Europe and now China has filtered into equity valuations,” said Lawrence Creatura, a portfolio manager with Federated Clover Investment Advisers.

Source CNN Money

Since we know what fundamental data drive the market down, we also can see that the market is in bearish trend from technical perspective.

The market (here represented by (SPY)) wildly broke thru the resistance of the pennant pattern, see the note #1 on the chart, a few days ago. It immediately dropped down to a long term support on $122 level (see large green arrow) and bounced back. On hopes and wishful thinking the market rallied up, shortly broke thru the pennant resistance line (magenta line) and long term resistance on $118 level (thin blue line at that level). Then the market could rally all the way up and re-test the short term resistance (see small green arrow with note #3), but it didn’t have strength to do that, reversed and fell back down (see the reversal pivot marked by a large red arrow). The wild fall following this short term reversal can now be another re-test of the support at $112 level or we will broke thru. However, in short term perspective, we are seeing new lower highs (see arrow with tag #2 pointing to the new short term trend), which confirm that the market is in bearish trend and there is no sign (yet) of strength.

With all bad news coming from Europe, economic slowdown, it is very likely that the market will continue down. We will see in the following weeks. Being said that, I am staying bearish and holding my put positions in SPY. The pre-market data point to another drop down opening on Monday (it can change by then, however), so wait for further slope down trading next week.

Happy Trading!