What a difference a day makes! In Friday morning's market missive entitled "Is It Time To Worry?" the argument was made that the chart of the DJIA (NYSE: DIA) was not representative of the state of the overall market. While the venerable Dow was looking sick, the point was the rest of the major indices were "just fine, thank you." Thus, it was suggested that investors "listen" the message from the broader market, which appeared, at the time, to be fairly upbeat

Wrong!

Whether it was a case of algos gone wild, buyers standing aside in front of potential "headline risk" over the weekend, or fears that a new crisis/contagion was developing, the bottom line is the "everything is fine" message that appeared to emanate from the major market indices turned out to be flat out wrong.

The DJIA had a horrible day Friday, losing 318 points and experiencing its first back-to-back declines of more than 1 percent since April 2012. The S&P 500 (NYSE: SPY) got slammed for a loss of more than 2 percent (2.09 percent to be exact), which was the worst day since June and the league-leading Midcaps (NYSE: MDY) and Small caps (NYSE: IWM) were smoked for losses of more than 2.5 percent. Ouch.

So, to answer the question posed in Friday's column, "Yes, Virginia, it does appear that it is time to worry again."

What's This All About?

Before we embark on a stock-chart review redo, it would appear that there is some confusion as to why stocks got hammered on Friday. So, let's see if we can make some sense of things here.

While talk of the weaker-than-expected Flash PMI data out of China has been receiving a lot of attention in the popular financial press, China really had little to do with Friday's dance to the downside. No, the current freak-out in the markets has more to do with the potential for another emerging markets currency crisis and the potential for contagion to spread.

All Eyes on Argentina

The key here appears to be that the Argentine peso tanked on Thursday to the tune of about 12 percent, which was the biggest fall since 2012 - the last time Argentina was forced to devalue their currency. According to reports, the move was triggered by the central bank's decision to dial back its support for the peso amid concerns about falling reserves. In English, this means the Argentinians decided to let the currency fall/float.

Thus, the fear that a new crisis is brewing sparked concerns about contagion in both emerging markets and Europe.

For example, the Turkish lira sank to a record low against the dollar for a ninth straight session, this despite the fact that the country's central bank had intervened in the FX market. In addition, the South African rand fell to levels not seen since 2008, Ukraine's currency dropped to a four-year low, and the Brazilian real hit five-month lows.

Then on Friday morning, the Turkish lira, Russian ruble, and South African rand were all down more than 1% against the dollar before trading on Wall Street began. And apparently there was also a fair amount of focus on the spike in emerging market credit default swaps (CDS).

Traders Move Into Crisis Mode

Given that the markets have been plagued with various crises since 2008, traders know exactly what to do when a potential crisis emerges. In short, traders buy US Treasuries, get long premium via the VIX (NYSE: VXX, VXZ), add some gold (NYSE: GLD) and take in some Japanese yen (NYSE: FXY). All are classic flight-to-quality plays.

Sound Familiar?

If this sounds familiar, it should. Recall that in June of last year, traders freaked out about the potential for another emerging markets crisis/contagion. The worries slammed the S&P for a loss of 2.5 percent that day. However, that potential crisis faded before it even got started and stocks immediately reversed higher in the ensuing week.

Thus, the question of the day is whether Friday's nosedive was the start of something meaningful or simply a case of the trend-following algos falling all over each other. It is also worth noting that the potential for negative headline risk likely kept the dip-buyers on the sidelines on Friday. So, it will be interesting to see how stocks react early in the week.

For clues on whether or not the current decline will continue, let's take another look at the charts of the major indices and "listen" for the message.

Rechecking The Charts

The chart of the DJIA was the first to signal trouble. And while it took a while for the rest of the gang to catch on, it now appears that the Dow had it right.

On Friday, we suggested that the Dow was an outlier. But one glance at the chart below makes the situation very clear. This decline is much more serious than anything seen recently.

Dow Jones Industrial Average - Daily Prices

The keys to the Dow chart are: (a) the index is now in a downtrend, (b) the 50-day has been violated, and (c) the very important support level at 15,700 appears to be a logical battle ground. We would also note that the 150-day is currently at 15,575.

Next, let's take another look at the NASDAQ. Before Friday, this chart was the Exhibit A in the argument that things were "just fine" in the stock market.

NASDAQ - Daily Prices

While Friday's action wasn't pretty (the NASDAQ (NYSE: QQQ) lost -2.15 percent), the bottom line here is (a) the long-term uptrend remains intact, (b) near-term support at 4100 has not been violated, and (c) the index remains above its upwardly sloping 50-day moving average. Therefore, the chart of the NASDAQ remains in pretty good shape.

Next up is the chart of the smallcap index - the Russell 2000. Again, prior to Friday, this chart was clearly bullish.

Russell 2000 - Daily Prices

While the overall chart is still bullish, it is much less so after Friday's shellacking. However, an objective review suggests that (a) the longer-term uptrend is intact, (b) the index remains above its 50-day and (c) there is short-term support at current levels.

Bulls should take note that a break below 1130ish would be a problem and suggest that the bears had taken control.

Then there is the midcap index, which, like the NASDAQ and the Russell, had looked great until Friday.

S&P 400 Midcap - Daily Prices

The keys to this important index are (a) the uptrend is now toast, (b) Friday's dive violated the 50-day moving average, and (c) the index finished right at important support. A close below 1310 would be a problem in the near-term while a move below 1280 would mean that a full-fledged correction is "on." Thus, the early action next week will be very important.

Finally, let's look at the S&P 500, which is a large-cap, blue-chip index generally viewed as the best measure of the overall stock market.

S&P 500 - Daily Prices

The chart of the S&P 500 went from "pretty good" to "ugly" in one session. The uptrend is now gone. The 50-day was smashed. And the index cut through the near-term support like a hot knife through butter.

Looking ahead, a close below 1770 would signal an intermediate-term correction as a "lower low" would be established.

The Takeaway

The key thing to take away from the charts right now is that the "worries" we downplayed on Friday morning now appear to be real. When you are wrong, you are wrong - so it is best to admit it and move on. Remember, our goal is to stay in tune with what IS happening in the market, not make predictions about what we think/hope might happen.

Currently the key questions include: Will last week's decline continue? Was the move on Friday overdone? And are the worries real or merely overblown by hyper sensitive trading algos?

To be sure, we don't have the answers at this point. However, the message from the price action on the charts would appear to suggest that this is no time to be complacent and that the bears may have an opening here.

Then again, our furry friends haven't been able to do any meaningful damage for quite some time. Will this time be different? Of course, time will tell. So stick around, this is going to be interesting!

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Turning To This Morning... All eyes remain on emerging market currencies this morning. The latest in the crisis is Turkey's central bank says it plans to hold an emergency policy meeting on Tuesday after the lira extended its record-breaking decline. As expected, Asian markets took it on the chin overnight while trade in Europe is relatively calm. Rates and stock futures in the U.S. are both moving higher in the early going as some feel Friday's decline was overdone. 

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets: 
- Japan:      -2.51% 
- Hong Kong:  -2.11% 
- Shanghai:   -1.04% 
- London:     -1.38%
- Germany:    -0.22%
- France:     +0.18%
- Italy:      -0.07%
- Spain:      -0.08%

Crude Oil Futures: +$0.40 to $97.04

Gold: unchanged at $1264.30

Dollar:  lower against the yen and pound, higher vs. euro

10-Year Bond Yield: Currently trading at 2.760%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +4.51
- Dow Jones Industrial Average: +50
- NASDAQ Composite: +4.57

Thought For The Day...

Smooth seas do not make skillful sailors. -African Proverb

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