Ok guys, let's look at a few things here.

First here's our usual friend:



And.....



Now is that a decisive turn? Hell no. In fact, MACD is still up and divergent along with DMI still showing upward pressure. RSI was radically overbought (on rates); this sort of correction is not surprising at all. While the impact on the market wasn't all that surprising, but it sure was violent.

From a technical perspective there is nothing that indicates that rates are done. There's also nothing from a fundamental level suggesting this. Folks, the bond has to drop back below 480 for the "danger zone" to have been eliminated! We didn't even engulf the previous day's rise today, which means betting on a trend reversal here would be dodgy at best.

This morning I commented that we had basically two scenarios in front of us - Scenario #1 was foretold by a breakout to the downside, while Scenario #2 foretold a second stab at the intraday highs - but it would fail - in other words, we had one more thrust up left.

Now I'm not quite convinced - yet - that we're seeing Scenario #2. But this is in fact the far more ominous scenario, because if we are indeed in for a final stab higher, it means that we are going to synchronize with what is almost certain to be a CRASH in the mainland China markets, and that this is likely to come within the next couple of weeks. And let me be clear - when I say crash, I mean crash - like a 50% decline. Yes, I'm aware that this will take five days (at least) since China actually closes stocks for trading when they decline 10% in a session.

I've been asked why I think this might come soon in the Chinese markets - here's my reasoning (I've gone over some of this before, and it just keeps getting amplified as days go on).....

The Chinese cannot afford to have a crash during the Olympics. They need it to happen, and for the recovery to happen, before then. Civil unrest is absolutely unacceptable to them during a display of their "wonderful command political system". As a consequence they will take their medicine now rather than later, and they've been warning people for a couple of months now.

In addition their inflation numbers are hot and so are their GDP numbers. Neither are sustainable. They know that too.

Finally, they have the "MEW" problem but worse - they are seeing HUGE moves of equity into the markets - and people are quitting their jobs to trade! This is clearly out of hand, much like we had a clear bubble in 2000.

So why now? Primary because the double-top would be a good excuse, and further, they've got a good reason to pop it now. They've also got an inflation problem to bring under control, and sooner is better than later. Finally, I think they'd rather see this happen and the trickle down spread to us as a way to deflect attention off the protectionist legislation that is brewing in the Senate and House.

The contagion effect could be severe if we get it this way.

So in other words I'd vastly prefer that we got a 20% sell-off right now. That is, today was just a counter-trend rally and from here onward we will continue downward until we base around the February lows - or perhaps even as far down as the summer '06 lows. If we instead get a strong drive upward we are at severe risk to blow up in the next few months, perhaps going so far as testing the 2002 lows instead!

Not all at once, mind you, but over several months' time (or perhaps longer!)

Here's something more ominous - we had both new highs and lows on the NYSE come in over 75. I don't have access to the McClellan Oscillator readily available, which is one of the confirmations - the other (10 day moving average), however, fits. Update: The McClellan Oscillator was in fact negative today; the Omen thus has occurred.

This is a "Hindenberg Omen", needing a second occurrence to be confirmed within the next 30ish days. If we get one the odds of a crash in the markets are quite good.

The technical definition of a "crash" is a 10% - or more - downward move. That would be extraordinary were it to occur. I'm not going out on a limb and predicting one - yet..... but if we get a second Omen, the odds, historically, rise to close to 90% within the next three to four months, based on historical data!

The ABX indices did essentially nothing today.

In company-specific moves Honovian broke a key technical support level of $20 to the downside, down almost 2% on the day with the broader markets up a pip and a half. Other builders didn't do great, but this was particularly bad.

Oh, and Apple was down nearly $3. Gee, that looks like a good call - at least short-term - eh?

Tomorrow and Friday will be key data days. Tomorrow we get PPI data and Friday CPI. A hot number on either (and most especially both) of these is likely to send the markets down BIGTIME.

On the other hand, if we get a tame number then we are nearly certain to test Scenario #2 - it will then be a test of the Hindenberg as well, to see if we get confirmation and, if it occurs, well.... you know.

Again, my key levels are 1510 and 1494ish on the S&P (upper and lower); we are above the upper right now but not decisively so and in fact have weak resistence right where we closed. On the Russell the neckline is at the 821ish level to the downside.

A breach of the downward targets is fairly solid evidence that a major top is in. On the other hand, a break upward from here of any significant magnitude indicates we're in for one more stab at the all-time intraday first.

For me to believe a change in the outlook I'd have to see a breach of the all-time intraday high on the S&P and follow-through on all the other internal and major indices. And that's just on the technicals.

From a fundamental point of view, we've still got a couple of major problems, the most serious being housing. I see zero evidence that this is being addressed in any meaningful form at the present time. And by "addressed", I mean affordability. Like it or not, you're not buying a house at 5x your annual household income without resorting to very dodgy mortgage instruments, which is how we got in this mess in the first place. Extending this problem out until we face a multi-pronged financial meltdown from baby boomers retiring - 5-10 years from now - will result in the risk of a total financial collapse in the United States. We simply cannot afford that, and if there is a God, he will not allow that scenario to play out - irrespective of whether some folks would like it that way.

There are a few signs that this may be correcting. Like this one in Ft. Myers. The problem is that we need this to happen nationally in all of the places where the crazy asset inflation occurred. Until it does, the only other way to fix the problem is for about 10 years to pass with no price appreciation. At least, that is, the only other way that doesn't involve crazy wage inflation.

I took my HOV PUT profits today; while I think there might be more downside coming there were only two more days on them and they were amazingly in the money. No need to be a pig and end up giving any of it back.

Update: The McClellan update is in, and the Omen did occur. We need (at least) one more in roughly the next month for it to be "confirmed".

Summary: Be very careful no matter which way you're playing this short-term. The odds at this time favor a retest of the highs, but this will be data driven by the CPI and PPI numbers tomorrow and especially Friday. If either (and especially the CPI) number comes in "hot" the gains of today will evaporate into the ether!