Friday, May 21, 2010

Are we there yet?

About the time when this market downdraft began, I wrote a post on May 6 [emphasis added]:

Already I see a number of technicians calling for an intermediate term bottom at around the 1040 to 1100 level on the SPX. Given the weak action of the broader NYSE Composite, my best guess is that support materializes closer to 1040, which also coincides with the February lows. If the market does descends to those levels, how will market participants react should we approach those price zones?

I would watch the sentiment indicators. Is there widespread panic (which would be bullish) or are traders more constructive (which would be bearish) to see if this is just a 10-15% corrective air pocket or something more serious.

Now that the SPX is within the 1040 to 1100 zone, psychology has in a very short time turned from decidedly bearish to a full blown panic about a market crash. Barrons recently reported widespread put buying and Richard Russell is running for the hills.

More telling, a recent CNBC poll saw an incredible 38% of respondents believing that the Dow could go to 5,000, which represents a further 50% haircut from current levels:

Does this sound like panic? Even though you may be a bear, do you believe that markets go up or down in a straight line?

The ferocity and intensity of this move has surprised a bear like me. The stock market is extremely oversold and now trading at an intermediate term support zone. My inner trader tells me to get ready for a short sharp rally before re-entering on the short side.

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