I know the year seems as if it has been bullish, but this pullback that began six weeks ago has taken the gains out of this market for the year. The S&P 500 is up 1.1%, but now the Nasdaq is red by 0.3%. Not pretty since it was a very good year for the first five months. How fast things can change from good to bad. It came out of nowhere and hasn't stopped for six straight weeks, with the past two weeks being particularly bad, if not gruesome. The Nasdaq is now down 243 points off the top with the S&P 500 down 100 points. 1370 to 1270 at the close today. 8% on the S&P 500 and a little more than 8% on the Nasdaq.

Not much really in the bigger picture, but it's more about how we've gotten here. The speed of the move down in conjunction with some terrible economic news and now add in the fed saying QE2 is it. No more easing for the banks. No QE3. Since he spoke earlier this week the market selling has accelerated. It was already rocking down, but once he spoke and said things are worse than he thought they'd be, the market said not good. When he added that QE2 was all there was going to be, he basically said the free money machine is being turned off soon and won't be coming back any time thereafter. Although I don't believe him personally.

Bottom line is the market hated the thought of no more free money for the banks. Many are solvent because of that free cash, and now it's apparently going away for at least a short spell. Add in those nasty negative divergences at the top on the weekly charts, and sentiment at 41.6% at the peek of things, and we now have an overall flat market for the year. Goodbye gains and hello a struggling market now in a confirmed down trend.

The behavior of an individual stock doesn't necessarily correlate to how a market will act as a whole. However, you have to pay special attention to leading stocks and see how they're behaving to get an idea of what may take place in the market as a whole. Again, the market doesn't have to behave the same way some leaders do, but you do want to take notes about what those leaders are doing.

For instance, many leading stocks, such as Cummins Inc. (CMI), are trading well below their 200-day exponential moving averages. What's especially troubling about it is the fact that a leader, such as this stock is, didn't fight a lick when it tested the 200-day exponential moving average. It had a one-day bounce, which also printed a black-filled candle, meaning it closed lower than it opened. The very next day it cratered below the 200's with a long red candle that closed on the lows. It hasn't recovered.

An inside day followed by another huge day down today. CMI is far from the only stick that this has happened to. There are many others in the same camp. You ask yourself why no fight? Why no attempt to hold that key 200-day exponential moving average? Strange to say the least, especially since its the first test of the 200's in over a year. Not normal to just break down below without a fight. Again, something worth noting. It doesn't mean the market as a whole will do the same but it is very concerning. Something that needs to be respected for the potential message.

So what's going on here that's making the market so vulnerable? Is this still just a bull market pullback? Is it the start of a new bear market? We know that liquidity is the key to any bull market. Without it you can't blast higher. It's the single most important component of a bull market's ability to move upward over time. There are two potential problems. One is liquidity, which will stay with us in the form of QE3, or something else that accomplishes the same goal. However, the liquidity won't get used as the economy is falling apart rather rapidly here. Free is great only if people will take it. If the banks have the cash, but no one uses it, what's the point of having it!

The second problem is worse still. If the fed holds to his promise of no QE3, or anything else with a different name that acts as a QE would, then there's no more liquidity. That's the kiss of death for any market. The fed pretty much admitted this week that the previous 2 QE's did not work, except for the headache of creating inflation. Inflation without growth is the worst case scenario, and this seems to be where we are at the moment. It seems the fed is saying I have to stop creating inflation because it's killing the average person in this country, especially those without jobs, or who are struggling even if they do have a job. You can't keep killing people with higher inflation. He doesn't mind doing that, sadly, if at least the free money was being used to stimulate the economy. We now know it isn't stimulating anything. Fed in a box. Not good for anyone.

1262 S&P 500 is the 200-day exponential moving average. If we lose that along with the march 2009 up trend line at 1260, the market is going to test the lows made in March at 1249. If that gives way with force, either now or any time in the short-term to come, that's a sign that we're possibly dealing with something far worse than a bull market pullback. The bear could be back, but let's not go there at this time. We're still above 1249, so we're not there yet, but the market is vulnerable.

Terrible news on the manufacturing front is here. It took everyone by surprise but we're close to actual contraction now Just three points above an economy that's contracting and falling fast. With news worsening on all fronts, and with many leaders already in bear market patterns, our overall market is in trouble but should fight. We will learn a lot this coming week about where we are, so hang in there and keep lots of cash on hand.

Peace,

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

Mr. Steiman's commentaries and index analysis represent his own opinions and should not be relied upon for purposes of effecting securities transactions or other investing strategies, nor should they be construed as an offer or solicitation of an offer to sell or buy any security. You should not interpret Mr. Steiman's opinions as constituting investment advice. Trades mentioned on the site are hypothetical, not actual, positions.

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