Since September 2000, there have been 5 panicky sell-offs, where the crowd was sent reeling by tumbling stock prices. In each one of these 5 instances, there is a specific week that can be pin-pointed as the start of the panic phase.
I'm talking about the point where the selling accelerated into a climax. Interestingly, this point has always come at a technical "failure" level, where the last line of support doesn't hold. At such a failure, there is growing recognition that the bottom could drop out of the market. The selling then accelerates to a capitulation low, which leads to a rebound.
But what's really interesting is how far prices tend to rebound. In each of the 5 previous panic sell-offs, prices have rebounded to test the top of the weekly breakdown candle. In other words, the market likes to come back to the high of the week that kicked off the acceleration to the downside.
The question now revolves around the big panic sell-off from last spring and summer, which ended at the July low. I've been pointing out how the markets have lived within that 3-week range from the July 7th downside blow-out -- and we're still in that range now. What's open for debate is whether that was the weekly breakdown point, or whether we have to ratchet it up to the 1050 area on the SPX. You could make an argument that this higher area was the acceleration point for the decline, and perhaps prices need to go back up to probe that area.
Personally I think that the breakdown week that started at 990 was the inflection point. That's where the September 2001 lows got taken out decisively.
But if this weekly candle is breached to the upside, then the market may need to go all the way up to 1050 to really get bullish expectations fully stoked to a fever pitch. There won't be a single bear left standing at SPX 1050. For that matter, there weren't many left standing on that blow-off to the upside to 1007 on Friday. This naturally set-up the correction we are seeing now. But we don't know yet whether that was enough to kick off a real decline phase.
The real test of this market is going to come when we see such a decline phase, and a real cycle of fear. We'll know what the market is made of when the VIX moves back up to a higher range. Unfortunately, we seem to be stuck now in a period where the day-to-day squiggles on the VIX aren't that meaningful. When the VIX is vacillating around in a tight range in the low 20s, the important point is the VIX is low, and staying low.
It's the exact opposite of what was happening back before the Iraqi war. The VIX was vacillating between 35 and 40 for weeks. The squiggles within that high range were also not that meaningful. What was important was that the VIX was stuck in a high range, and when it broke out of this range to the downside, the market was in a position to rally -- and rally it did.
So now we're in the opposite situation. The war is over, the market is up, and the VIX is stuck in this low range. But what's going to happen when the VIX cycles back up? Can investors survive the next cycle up on the VIX?
Often when the VIX is giving confusing signals on one time-frame -- in this case, the daily chart -- I pull back on the range of vision to look at the next higher time-frame, which in this case would be the weekly chart of the VIX.
As I've shown previously, the weekly momentum of the VIX has now hit the lowest point of the entire bear market. Bullish expectations have reached a peak. The market is certainly in a position to move into a cycle of fear, with the weekly MACD (a momentum measure) turning back up from a very low level. A rising weekly MACD is strongly associated with a declining market. Such a weekly decline can last for months.
So in terms of sentiment, we're at a potential inflection point. The big pendulum of sentiment is set to swing back against the bullish crowd, and it will be starting from the lowest point yet in the entire bear market. There will be a massive amount of potential energy to be released against the bullish majority. This is also reflected in the long-term gauge of our Sentiment Dashboard, which you can see below.
This may not play out immediately, but it's premature to get wildly bullish until we see how the market survives the inevitable big test that's coming.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tank filled by 1.5 points to 11% full of negative sentiment. We have not yet seen a breakout from the recent low range, but one shock to the market and we will see that.
SHORT-TERM: The hourly gauge remains in a decline phase. The decline phase was robust until the last hour of trading when stocks bounced back and the VIX dropped back below 24. We're ripe for an hourly advance phase, but it hasn't quite kicked off as of the close on Monday.
MID-TERM: The mid-term gauge progressed by 6 points to 72% in its decline phase. There is evidence of this decline phase's finally getting some traction as our Confidence Diffusion Index ticked up to a bearish 3 of a possible 7 (up from -1 last Thursday).
LONG-TERM: The weekly gauge progressed 3 points to 6% in its decline phase. Our weekly CDI also ticked up to a bearish 3 of a possible 7, indicating increasing evidence that bearish sentiment is starting to rise.
BOTTOM LINE: Both the long-term and mid-term gauges are now in decline phases. While we may see an hourly advance phase tomorrow, we would expect that the SPX will not break to new highs and that there will be more downside in price before we get a new mid-term buy signal.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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