The Computers Did It?

trader88

I suggest you forget all this nonsense about the glitches in computers and software being the true culprits behind today’s near collapse. Today’s mentality would lead to charging the NYSE with fraud.

The market has been waiting for something like this to happen since the bottom in March of 2009 occurred, over a year ago. Why? Because this is the way primary bear markets end. The market has to prove itself before a bear can advance into a bull market once again. It can only prove itself by going up and down a number of times until it becomes clear that it has the strength to go on to better things. It does this by providing comparisons with preceding trends in the opposite direction.

The rally that started in March of 2009 had to be compared to the previous important move, which of course, was a deep and prolonged plunge that started with a peak in 2007 and finally ended in March of 2009. You have to make comparisons between the downtrend and the uptrend along the way.

The last time I showed such a comparison was by running a long-term chart of the Dow with a Note attached on 4/22/2010. That’s a short time ago. The Note was short and simple: “The Dow has now retraced about 57% of the bear market decline.” It showed in a simple way that the Dow’s recovery from the bear low was only a little more than half of what had been lost in 2007, 2008, 2009 and 2010. It wasn’t a gigantic super rally that grown men trembled to behold. It was an ordinary recovery rally. But yet, hordes of investors, traders and pundits wrung their hands in admiration for every point of that “incredible rally.” I repeat, the percentage that a move has been able to progress is not nearly as helpful with comparing the magnitude of that trend with the peak of the preceding trend, the trend that is being retraced and thereby corrected.

But eventually there has to be a retracement of the corrective rally. In this case it took a long time, and there is no reason to think the process has been completed. The important thing is that the bear market has finally revealed its underlying vulnerability: the vulnerability that exists within any bear market until it finally staggers out carrying injured investors under its arms.

I should point out that the capitulation we saw today could be followed by repeated shakeouts of the same type. The first shakeout is almost invariably followed by at least one more shakeout. A series of shakeouts eventually form themselves into any one of many possible bottom formations, and the breakout above that designates that the bear is dead.

And yes, in case you’re wondering, am I still going to preach patience–in the face of the panic selloff we saw today? The answer is yes, but as always, you have to think for yourself.

Now for the trading stats. All 16 Breadth Groupings were Super Decisively Negative. I bet you never guessed. Today’s Breadth was even worse than Tuesday’s. The Ten Important Averages were all down over three percent, with the overall average at -3.38%. The Dominant PV Relationship was PDVU (1715 stocks). In the market’s position this is an oversold signal. I’ve been warning right along that, following a significant high-volume selloff, PDVU is a sign of an oversold market. (This is the first time I’ve had the opportunity to use PDVU as an oversold signal.) In many other market configurations it is a bearish warning. Incidentally, because we have an oversold signal does not necessarily mean that a bottom has been achieved. There may be several PDVU signals before a buying opportunity actually becomes manifest.

We’ll be watching the VIX more closely, after having seen a strong move up today. It is a contrary indicator and eventually generally helps pinpoint a bottom situation. Until now it hasn’t been high enough to be a factor.