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Before looking at interest rates...  Check out the bullish percent of the financials shown below.  It is now within the extreme oversold 20-to-30 level.

Below is a monthly chart of the financials with the bullish percent indicator at the top.  This indicator rarely gets so oversold, and the last time it was this low was the spring of 2000.   This bp level presents an opportunity, but before jumping in right away, note the monthly sell signal registered by the monthly MACD. 

The 2-Year and the 5-Year are now below their 40-week moving averages and approaching support levels.  The 10 and 30-Year rates are just above the 40-week averages.  Breaks below these averages might suggest that growth is slowing and the debt crisis is choking the economy.  Maintaining above these levels would indicate to me that the debt problems will pass (for now) and that stocks are in a healthy pullback representing opportunity for investors.

Let's hope the markets can avoid a major panic today.  I'm not sure if the weekend gives investors time to gain perspective and calm themselves, or if it provides time to get worked up and determined to sell before more damage is done.  I don't have any special insights today so I chose a couple charts of interest.

Both consumer staples and consumer discretionary have lost ground and are now below the 40-week, but as expected during a time like this the staples were the relatively stronger.  The lack of strength in the discretionary stocks since late spring hinted at the current weakness in the overall market.

Biotech stocks held up well last week although they had not participated much as a group in this year's rally, and their bullish percent has hovered in the oversold area for a number of months.  The monthly chart (originally from John Murphy) reveals at least one reason the group as stalled since the index has reached a major long-term resistance.  This could be a nice area for opportunity if it holds the uptrend line and breaks out above the resistance.

I found this really terrific Elliot Wave labeling by Martin Goldstein in the free daily Financial Sense site.  This is really clean labeling in my opinion and each wave shows excellent proportion.  It also does not show excessive sub-wave labels, and he didn't prematurely label the end of the current flat correction pattern.  Flats are the most difficult patterns to label and often result in throw-overs, traps and false signals.  The bullish percent of the precious metals stocks turned up a few weeks back and broke above the 50% level, but with last week's sell off the bullish percent turned lower again signaling caution once more in this area.  The shares sold off far worse than the metal which is not a good sign, and the shares were among the largest percent losers on the week which is another bad sign.  The Japanese Yen and the US Dollar both rallied on Thursday and Friday as carry-trades were undone around the world which seriously undermines gold and gold stocks.  Also, energy and commodities stocks were very weak despite the surge in oil prices, and gold shares usually participate with this group.  The gold stocks did hold above the 40-week and are still within the upper level the multi-month trading range, but the overall market backdrop is not helping gold stocks at the moment.

Last week's bullish percents are above and this week's are below.  Some comments are below.  Good luck to Declan and his family as they move back to Ireland over the next few weeks. 

TECH, SEMI and TELE are the stars.  They didn't even budge during one of the worst down weeks since the bull began late 2002.  Several weeks back I suggested the recent fascination with technology might be just late cycle rotation.  This week technology really proved to have more than temporary strength.  Large caps also showed their relative strength and were hurt the least as NDX and INDU remain above the 70% level, and OEX in the 60% level.  On the weak side were the financials of course as REIT, BANK, S&L, FINA were in free-fall and now in the deep oversold levels.  Savy investors will be looking at these areas to see when they turn up.  The turn higher may take a while, but it will happen and this is one of the primary values of the bullish percents... to help time when the downtrend has bottomed out and a low-risk longer-term investment is available.  BROK, DISC and RETL are also weak and may need additional time to bottom out.  GOLD let me down by turning lower, and signaled again for caution in this area.

Gold shares were hurt badly today along with everything else.  The only good news is that some technical support levels held such as the 50% retrace, and the RSI at the 50-level.  If the gold index continues to hold these technical levels then the short-term uptrend may still be intact.

Below is a broader view of gold shares.  The ROC indicator held its technical level and the shares tested within the old range.  The shares then closed slightly above the recent highs for another couple of encouraging signs on an otherwise horrendous day.

The gold ETF pulled back very nicely to the uptrend support, but now must prove it can hold at $63.50 or the trend is in question.  I was surprised to see the US Dollar index pull back today while gold sold off as well.  But then I saw that the Yen jumped quite a bit, meaning the Japanese were likely sellers of gold today.

Today felt like capitulation selling.  The new lows were unreal.  As shown in the chart below, this week has had the most new lows since the bull market began late 2002, and the week isn't over yet.  There has been a lot of weakness in this market behind the scenes.  

This market still feels to me like a market that wants to go up.  But when I browse through the charts that measure breadth there isn't a lot of positive news.  In the short-term, the market is quite oversold and due for a bounce as shown in the chart below.  If the market starts to show upward pressure to relieve the oversold indicators, there is a possibility it could last through to the month end period in which stocks are usually strong.

It looks like we are close to a cross-under of the zero-line for the NYSE summation index which would be a sell signal for the intermediate-term cycle.  The NASDAQ summation has been under zero for sometime yet the index has been strong indicating that the strength in the index is coming from a narrow group of outperforming stocks.

The jump in new lows is scary and is primarily from financials, utilities, consumer, small and mid caps.  Check out this comment by Arthur Hill.

"Two weeks have passed since the all time high on the NYSE Composite and Net New Highs on the NYSE dipped to their lowest level since October 2005. There sure are a lot of new lows for two indices that looked quite strong a few weeks ago. While the indices looked strong on the outside, there were many weak stocks on the inside. New 52-week lows don’t occur overnight. It takes sustained weakness to forge one year lows and this reflects sustained selling pressure."

The bullish percents are solidly confirming to the downside.  The NASDAQ is now slightly below the important 50% line which means that over 50% of the NASDAQ has P&F sell signals.

The NYSE received a fresh bullish percent sell signal that puts it below the 70% overbought level and heading towards the next test at 50%.  If you believe in the message from the bullish percents, it is saying the NYSE is correcting.

The yield curve has been flattening again as money has moved out of T-Bills and into 10Y notes which have now pulled back to below the 50-day.  The weakness in rates is probably partly a flight to safetly, and partly due to slightly lower economic growth than anticipated.  If 10Y rates stay within the range of about 4.9 and 5.3 it will probably be favorable towards equities.

I read a comment yesterday where someone suggested the 10Y rate is forming a bullish flag, implying that the recent trend lower in rates is temporary and that they are headed higher to above the 5.25% level.  It could be a flag, but rates have already broken below 5% which is a break of important psychological support, and are now headed to a test of 4.91%.  If the 4.91% level is broken, then the yield curve would likely invert again and it would suggest more than a short-term pullback implied by a bull flag.

A lot of people are nervously watching banks, S&L's, insurance and brokers to see if they can hold support as they come under pressure from the housing recession.  Martin Pring often states that the market generally follows the brokers, and if that is true then for the market to hold its uptrend the brokers probably need to hold this support level.

Below is a chart I found in Financial Sense.  I can't vouch for the accuracy of the chart but it corresponds with my experience.  If accurate it shows the next six months to be an opportunity for precious metals.

The HUI gold index is at a critical resistance point.  The index could take a break this week and consolidate a bit, but it looks poised for a break out.  Of course, no guarantees because the US Dollar also looks like it could bounce a bit which would work against gold and silver stocks. 

Below is John Murphy's perf chart.  Gold and Silver stocks have been the big winners since the July-4 holiday week.  This is now a market where investors need to be in the right sectors to make money.  Not shown below, but the consumer stocks and small caps have joined the financials as the weak areas of the market.

NYSE short interest rose to 8.4 days to cover which is well above the prior peaks.  Ordinarily, the peaks in the market correspond with the lows of short interest.  But now each new high in the market brings new highs in short interest. 

Last week's bullish percents are above this week's are below.  Gold and silver stocks had a banner week while the rest of the market struggled.  The market is entering a weak seasonal period, and August, September and October are usually no friend to the stock market.  Last year the market was so strong coming off a broadbased correction that it powered right through these weak months.  This year the weak seasonal period will have the help of the weak financial sector, so the risks are high that the market is at a tipping point. 

Red is a column of O's in a downtrend, blue is a column of X's in an uptrend.  Below 30% is oversold, and above 70% is overbought.  Yellow is a shift down, green is up.  Recommended blogs are Declan Fallon, VIXandMore, dk-report.

Economic strength in the foreign economies, high oil prices and the weak US Dollar helped support the precious metals, energy and large-cap technology and industrials.  The 10Y rate dipped below 5% which helped utilities.  The weakness shows up in concern for the US consumer as healthcare, financials, staples and discretionary were the poor performers.

On Friday the Chinese market very impressively broke above short term resistance and held at the uptrend line.  I am sure I am not the only one very surprised by this strength.   As long as the market holds this uptrend there is one less thing to be concerned about.

What is it going to take to get the people who answer these surveys to be bullish?  Even the newsletter writers are reluctant to jump on board the bull.  From a contrarian point of view, the skepticisim shown in these surverys continues to be favorable towards equities.

The survey information above can be obtained for free via the following sites.  Investor's Intelligence is from Market Harmonics.  Individual Investors is from aaii.com.  Low Risk is from lowrisk.com.  Birinyi Bloggers is from Ticker Sense.  For additional information about market sentiment, I recommend a blog by Brent Leonard.

Sentiment analysis is an important component when following the markets, and is considered a “contrary” indicator.  Contrary because if too many people are bearish then there aren't enough sellers left, the balance tips to buyers, and the market starts to advance.  If too many people are bullish, most funds are already invested, the balance tips to sellers and the market weakens.  One way to determine if investors are bearish or bullish is by taking surveys and tracking at what levels these polls indicate investors are at the extremes of bearish or bullish sentiment.

Keep in mind, sentiment analysis is not a science and only provides very general information.  Sentiment is not a signal to take action, but provides background about the current state of the markets.  For instance, there have been many occasions when bullishness reached high levels well before the market started to weaken.