After last Monday’s sharp rally, many technicians jumped to the conclusion that the bear was dead -- expunged in a wave of selling in a classic capitulation with high volume and enormous negative breadth.
Classic selling climaxes are known for all of that but also much more. What should have followed was a wave of high-volume buying, as big investors rushed after bargains. Instead, the major market indices bounced around with little conviction on either side and offered even more volatility until the close on Friday.
On Friday, options expiration provided for some action but, in the end, turned into a flattening-out process. After holding a gain for hours, the market finally sold off leaving us with a perfect little symmetrical triangle. And volume on Friday was not inspiring, either, with just 1.7 billion shares trading and a stand-off of advancers versus decliners.
The CBOE Volatility Index (VIX) made record highs, but this was not confirmed by one of my favorite indicators, the American Association of Individual Investors index, which suddenly switched to bullish from record bearish just the week before -- a very bad sign.
For now, we should keep our powder dry. Before we get knee deep in muck, let’s wait for much more direction from the sentiment and internal indicators and a sense of conviction on the part of the major market players. In such a volatile environment, it is much more prudent to be a follower than a buyer.
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