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The views expressed in this report are those of Lesley Beath and may differ from Morningstar's views.

Reviewed this week

• Overview
  When will the capitulation phase end? More...
• BHP Billiton (BHP)
  2011 could mark a peak of medium-to-long-term significance. More...
• Commonwealth Bank (CBA)
  A break of key support. More...
• QBE Insurance Group (QBE)
  Break of long - term suppport. More...
• Wesfarmers (WES)
  Completion of a medium-term top formation. More...
• CSL (CSL)
  A fall in the AUD should have a positive impact - but no sign of that as yet. More...
• Mesoblast (MSB)
  An accident waiting to happen? The market has spoken More...

Please note: before making an investment decision, Morningstar recommends you read the fundamental research available on these stocks.

Disclaimer: To the extent that any content in this report constitutes advice, it is general advice that has been prepared by Lesley Beath without taking into account the particular investment objectives, financial situation and particular needs of any individual investors. If necessary, you should consult with a licensed investment adviser or dealer in securities such as a stockbroker before making an investment decision. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

Overview

Note: This report was written before the US market opened. Obviously the 1150 level on the S&P has been breached in Monday trading, as has the support on Nasdaq.

There is still the potential for a short-term bounce, given the declines in recent days, but as I did not believe that these levels would offer anything but a possible short-term reprieve, the medium-term outlook has not changed.

As discussed in the report, support levels will be less reliable than emotions now and what we need to do now is gauge when the level of fear is subsiding. The VIX and the T-Bonds will be the things to watch here; a retreat in either, and/or a pullback in the gold price would be the first indication that the capitulation phase was coming to an end.

In the last report I spoke about the potential Head and Shoulders reversal pattern that was developing on the S&P, and the Broadening Top formation (or 5 point reversal) on the Nasdaq. Well, the S&P broke below the 'neckline' of the pattern last week, smashing through its 200DMA, and the March and June lows. It is now close to the downside target of 1150 which was mentioned in the last report.

If the market reacts as many think it will on Monday (on the back of the US downgrade), that target should be met very quickly.

As for the Nasdaq 100, it has traversed from the upper to the lower limits of the broadening formation and has managed to hold above the June lows. Action on Monday in this index will give some indication as to whether there will be a short-term snap back, or whether the Selling will continue to intensify. If prices do not get too badly beaten up on Monday, then short-term risk moves to the upside. This would come at a time when bearish sentiment (according to the latest AAII numbers) is at the highest level since May 27, 2010.

But even if we do get a relief rally, there has been major Technical damage and the 200DMA will now act as a barrier to upside potential. In addition to the resistance of the 200DMA, the June lows form part of the neckline of the Head and Shoulders, and a pullback to that level would fit with this classic pattern. A pullback is not a certainty but it would give investors another Selling opportunity.

I guess we need to address the question which is probably on a lot of minds - could this be the beginning of a repeat of the 2007-2009 crisis? That's a hard one.

The memory of that time is still very clear in investors' minds and it is common to fear a replay; that is a normal psychological reaction. Fear has now gripped the market and from a Fundamental viewpoint the Financial press is full of gloom, finding very little to be positive about. Under those circumstances, the current fear can continue, leaving investors in a skittish mood.

I suggested last week that a breakdown in the US could lead to a capitulation phase and that is what has happened. Looking forward it is hard to predict when this will end. I guess there is always the chance that once the S&P gets to its target level of 1150 the worst may be over and a new positive phase can emerge.

But I don't think that is likely.

I would suggest that only a near-term push back above the neckline of the Head and Shoulders on the S&P500 would remove continuing medium-term risk.

In Europe, the pattern on the UK FTSE is similar to that on the S&P. But Germany looks far more ominous and I expect it to underperform the UK and the US in the near term; and this could easily turn out to be a peak of long-term significance.