Stock Market Sell-Off Ahead? Fast Pros Watching These Signals

On Monday, the Fast Money pros were closely watching the action in the market with chatter growing that the rally may be challenged.

At issue was a draft of an EU communiqué, which suggested overseas leaders are growing worried that austerity measures, like those imposed on Greece and Italy, risk stoking a recession and plunging the EU’s fragile economy into a downward spiral.

With the S&P up 4% year to date, the question becomes whether the market believes relative strength in the domestic economy and good earnings from US companies can trump the potential resurgence of Europe’s financial crisis.

What should you make of it? How should you position now?

Strategy session with the Fast Money traders

Trader Steve Grasso thinks a pullback may be in the cards. On the floor of the NYSE he’s hearing the chatter, first hand. “The market is worrying about Europe,” he says.
Grasso suggests watching 1300 on the S&P as a key level. “If we break 1300 – there are only a few stutter steps before we go to flat on year – 1257,” he says.

For another tell, Pete Najarian suggests watching the XLF. Financials were a weak point in the market on Monday, with investors believing banks would be first hit by an overseas ripple.

“The XLF is sitting right above the 200-day. If the XLF holds 13.90 that’s alright – but if we break lower, that’s would be concerning to me,” Najarian says.

Turning to the charts for insights, technical analyst Abigail Doolittle says patterns are mostly negative. "The XLF is showing a topping pattern – that confirms a bearish outlook for bank stocks," she says.

And charts of the S&P are mostly bearish. "Last week the S&P attempted to run at 1335 and it was stopped out. The market is probably in a sideways trend between 1120 and 1350," she says.

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Trader Josh Brown has a different take. He thinks there are single stock stories in the market that still work.

“The index isn’t telling the correct story – there are some break outs across the market – watch the trees, not the forest. Check out the biotech ETF .”

Trader Jon Najarian agrees. He thinks areas of the market can continue higher even if the financial encounter new headwinds. “

Steve Grasso does not buy the thesis. “70% of all stocks trade with the overall market,” he reminds. "Keep that in mind. If we break 1300, I'd go short!"

What do you think? We want to know!

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Trader disclosure: On Jan 27, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; P. Najarian is long AAPL; P. Najarian is long Long BAC calls; P. Najarian is long C; P. Najarian is long JPM calls; P. Najarian is long MSFT; P. Najarian is long INTC; P. Najarian is long YHOO; P. Najarian is long CROX callsl Grasso owns ASTM; Grasso owns AVAV; Grasso owns BA; Grasso owns D; Grasso owns LIT; Grasso owns MHY; Grasso owns PFE; Grasso owns PRST; Grasso owns S; Grasso owns WFT; Grasso owns XLU; J. Najarian is long CBOE; J. Najarian is long CME; J. Najarian is long CIGX; J. Najarian is long SPLS puts; J. Najarian is long AAPLS call spreads; J. Najarian is long RIMM call spreads; J. Najarian is long GLD call spreads; J. Najarian is long CROX call spreads; J. Najarian is long TXT call spreads; J. Najarian is long WLT call spreads; Brown is long AAPL; Brown is long JPM; Brown is long IBB

For Steve Grasso:
Stuart Frankel & Co and it’s partners own CSCO
Stuart Frankel & Co and it’s partners own CUBA
Stuart Frankel & Co and it’s partners own GERN
Stuart Frankel & Co and it’s partners own HPQ
Stuart Frankel & Co and it’s partners own HSPO
Stuart Frankel & Co and it’s partners own MU
Stuart Frankel & Co and it’s partners own NYX
Stuart Frankel & Co and it’s partners own PRST
Stuart Frankel & Co and it’s partners own WFT
Stuart Frankel & Co and it’s partners own XRX

For Colin Gillis
(YHOO) Investment banking (next 3 months): BGC Financial LP and/or its affiliates, expect to receive, or intend to seek, compensation for investment banking services within the next three months from all of the companies referenced within this report.
Lead or Co-manager: BGC Financial LP and/or its affiliates, has not acted as lead or co-manager in a public offering of equity and/or debt securities for Google within the last 12 months. BGC Financial LP and/or its affiliates has not received compensation for investment banking services in the last 12 months from Google.
Lead or Co-manager: BGC Financial LP and/or its affiliates, has not acted as lead or co-manager in a public offering of equity and/or debt securities for Microsoft within the last 12 months. BGC Financial LP and/or its affiliates has not received compensation for investment banking services in the last 12 months from Microsoft.
Lead or Co-manager: BGC Financial LP and/or its affiliates, has not acted as lead or co-manager in a public offering of equity and/or debt securities for Yahoo within the last 12 months. BGC Financial LP and/or its affiliates has not received compensation for investment banking services in the last 12 months from Yahoo.
(GOOG) Investment banking (next 3 months): BGC Financial LP and/or its affiliates, expect to receive, or intend to seek, compensation for investment banking services within the next three months from all of the companies referenced within this report.

For Edward Zabitsky
No disclosures

For Abigail Doolittle
Doolittle is long SSO
Doolittle is long SDS
Doolittle is long FAZ

For Pierre Ferragu
(RIMM): I, Pierre Ferragu, Senior Analyst(s)/Analyst(s), certify that all of the views expressed in this publication accurately reflect my/(our) personal views about any and all of the subject securities or issuers and that no part of my/(our) compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views in this publication.

For Kimberly Greenberger
Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: Abercrombie & Fitch Co., Express, Inc., Guess, TJX Companies Inc.

Morgan Stanley & Co. LLC makes a market in the securities of Abercrombie & Fitch Co., Aeropostale Inc, American Eagle Outfitters, Inc., AnnTaylor Stores Corp, Chico's FAS Inc., Children's Place Retail Stores Inc., Coach Inc, Express, Inc., Gap Inc, Guess, Limited Brands Inc, Lululemon Athletica Inc., Michael Kors Holdings Ltd, Ross Stores Inc., Tiffany & Co., TJX Companies Inc., Urban Outfitters Inc.

Morgan Stanley & Co. International PLC and its affiliates have a significant financial interest in the debt securities of Gap Inc, Limited Brands Inc, TJX Companies Inc..

For Nik Modi

1. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of the following companies' common equity securities as of last month`s end (or the prior month`s end if this report is dated less than 10 days after the most recent month`s end): Energizer Holdings

2. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Altria Group.

3. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Procter & Gamble Co.

4. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided.: Procter & Gamble

5. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking securities-related services are being, or have been, provided.: Procter & Gamble

6. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services are being, or have been, provided.: Procter & Gamble

7. Within the past 12 months, UBS Securities LLC has received compensation from this company/entity: Procter & Gamble

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