S&P 500 - March 2, 2009

charts courtesy of stockcharts.com

The orderly demine of the US equity markets continued on very high volume and bad breadth.

That was the bad news, the somewhat better news is that we are seeing divergences appearing on momentum and, also, on a number of breadth measures compared to November lows.

Because of the extreme downward momentum of today, I am labelling the decline of yesterday as part of a minor degree 3rd wave.

This is a subjective decision that takes into consideration today’s downward momentum readings, heavy distribution volume , and the slow, steady decline of the past few days. I may change my mind when I see further development.

The following count is also possible

Remember that waves can, and do extend. Betting prematurely on the prospects of a trend change can be hazardous to the inside of one's pocket and the lining of one's stomach.

For the very near term, if I am right with these counts, we should get a bounce very soon. That bounce may tell us if we are extending downward, or starting a new wave set upward.

Remember this is S&P futures and, sometimes, quick bounces or drops of the future market does not make it to the cash market.

Despite undercutting the November lows, VIX does not make it out of its range.

It’s as if the volatility traders are unfazed by new lows and think there is nothing extraordinary about it. They seem not to have seen enough to demand more option premium!!!

It will eventually get out of this. I am willing to bet a buck to a muffin that the direction of the resolution of the VIX's range will set the next directional movement of the market.

Market is oversold. But, remembering that on Friday every attempt at a rally was sold, and the fact that there was not a meaningful attempt at a rally today, I, personally, would not want to buy anything in here, maybe I can be forced into a few of long-dated, out-of-money calls for a gamble. But I have seen how oversold can stay oversold in bearish market conditions. Let others do the heavy lifting and set the tables at the next rally party.

Some may argue that today was the selling climax we needed. But why the complacency? Some of the worst bear declines happen while technicals are oversold.

I do not think this is the time to start shorting either. I think it is time to start thinking about conditions under which I would cover my shorts. But that’s me being cautious and determined to keep as much as my gains as possible.

The heavy volume and incessant selling of these past two days may at least have caused a seller exhaustion. We may get a bounce very soon. And that bounce may shed a light on how much more of killing of the bulls the market wants to do before some relief rally kicks in.

These are very dangerous times. Emotions run rampant, and I will come across all sorts of downward or upward projections and targets by all sorts of people.

I shall not let one man’s frustration, or the other man’s dreams run my capital. I will treat them all as noise from outer space, and shall pay attention to the charts and map my play, and exit strategy.

Long-term trend is down. Mid-term trend is down. Short-term trend is down.

S&P is at a pivot, 696. We are running out of OEW pivots.

My own pivots down are

660

610

561

515

these are numbers that I calculate running some algorithms.

to keep things in perspective, let's first look at this weekly chart of S&P

My first target for intermediate wave 5 has been met. we are seeing signs of momentum divergence. We just have to be patient to see if divergences translate into a better technical profile.

Next, let's look at this 20-year chart of the DOW. I would not show this to my child. Extreme depths of momentum, extrem peaks of volume, and at the verge of the technical abyss.