S&P 500 - Feb 18, 2009

charts courtesy of stockcharts.com

On the surface market did not do much. It chopped up and down a tight range and closed flat.

Looking a bit deeper, volume was above average and breadth was poor.

There are serious signs of breadth deterioration here. Yet, index refused to go anywhere.

Market is oversold, but in a downtrend in a bear, sometimes, if not often, a lot of damage is done while oversold drags on. Stochastics are dipping below 20. In the DOW, the Stochastics have already got to 10. Had this been a single stock, I would call for an accelerated selling and capitulation to new lows to end this down leg. But this is not a single stock, this is the US Equity market.

DOW is so close to November low, and this is an expiration week. In this market, billions can all of a sudden be summoned to the future markets to buy DOW or S&P futures – there are many loose billions floating the electronic banking systems nowadays. I will not be surprised if an all-out attempt is made to drag the index up into the gap that it opened on November 17.

Bulls need something to hang their shredded coat and at least claim a successful retest, and say things like an ongoing basing period . On the other hand, an appearance of a successful retest may start a fire, and some fear in the shorters’ camp.

So, a bounce may happen any moment, and the quality of that bounce may tell us what to expect.

Since the DOW has been leading the diving party, let’s take a look at it

So close to a violation of the November low. I am looking for either an intermediate C to end major B of Primary B, or a minor 3 of intermediate 4 of Primary A.

Looking at the structure of the chart above, I see a mature wave structure hitting the lower boundary of the falling wedge/channel below 7600. Coupled with oversold readings on this frame, the expiration week coming to its close, and three consecutive down days that we’ve so far had, I think the situation is ripe to squeeze a bounce.

I will be very careful with my short-term trading short positions.

To illustrate how dire the technical situation is for the bulls, let’s take a look at a somewhat bigger picture

Below the 2002-2003 lows and the technical gates will open, all the way down to the heart of darkness. If a bull is going to kick and scream and put a fight for his life, he should do it now. They need a bounce - bubble vision needs to claim a successful retest.

Again, I will be very careful with my short-term trading short positions.