The thread that separated the market from a breakdown and a breakout finally snapped, as the indices broke out of its channel and started the next leg down. For the past two months the markets traded in a narrow channel, and finally, the bears were able to break what many pundits had thought was a bottom in this bear market.

The only reference at this point, is the lows in the S&P and NASDAQ that were established back in late 2002. That level is roughly 768 in the S&P, and if that level breaks, I would say we are undoubtedly heading toward something more than just a recession. We would be creating on a monthly chart a new low and a confirmed double-top. Not the best of chart pattern when you are looking at the long-term health of the stock market. I would expect that we'll see a lot of effort to hold these price levels, even though they are over five years old.

Here's the Nasdaq and S&P charts...

The bulls continue to hold on by a thread - it's quite impressive really, the amount of time being spent at these lows clearly favor the bears in terms of weakening the support levels, but bullish divergences occurring throughout the most common of indicators, makes an interesting argument that the bulls are on the verge of putting in place a major rally. But please understand when we say rally, we don't mean bottom - there's a difference.

The entire market session minus the last 30 minutes of the trading session are almost pointless in the grand scheme of things, essentially its nothing more than jockeying for position between the longs and shorts, as the real action continues to occurs after 3:30 PM EST. That is when the market really starts moving and a great time to jump in on some intra-day plays, like PERY which we shorted at 4.62 and covered at 4.38 for a nice 5.1% gain today. 

By the way, since we have been speaking of divergences, by far one of the biggest and most important divergences that we have seen is with the VIX. At the market's lows, the VIX was registering levels in excess of 90, while now we are only at levels of 70ish (VIX tends to increase as the  markets sell-off and vice-versa). 

Hedge Fund Redemptions continue to dictate market action, and continues to do so during the last 15 minutes of each market session - just as we saw today. Now the markets are setting up for a major show down much like we saw last week. The technicals working in the bulls favor, is that almost any indicator you look at (i.e. stochastics, MACD, RSI, etc, show a significant bullish divergence, meaning that while the indices continue to fall, the indicators are showing strength or bullishness.

Also in the favor of the bulls is the lack of volume on the part of bears. In fact, since the huge 600-point rally that the bulls had last Thursday, volume has dropped off each day since. We are also extremely oversold in this market, and we could see some serious buying interest, as each of the three previous times we have tested these price levels, we have rallied. 

Here's the Nasdaq and S&P charts...

Huge day for the bulls today. You saw where on an intraday basis, the stop-losses started triggering all at once plunging the indicies over 3% each. But that was a good thing actually in that, it wiped out in one fell swoop, a lot of the weak hands, and left nothing but buyers to gobble up the depressed stocks.

Also equally impressive was the amount of volume that poured into the market as it rallied nearly 10% off of its lows. The volume support was there and that is important for this market in seeing follow through in the days ahead. Notice the channel on the Nasdaq, the index is trading perfectly within the range. It doesn't make much sense to try and short this market, until it gets near that upper range. 

Here's the Nasdaq and S&P charts...

Chalk up another one for the bears. A mid-day rally on news of further assistance being sent to Fannie and Freddie, while also helping existing home owners in trouble of defaulting on their mortgage. The news that broke mid-day actually saw the markets erase most of its losses, only to see the bears, once again, pounce on the hopes of those that bought the news.

Lots of talk swirling about a potential inverse "head-and-shoulders" pattern that is emerging, and there is truth to that. But the things that concern us about this - one is, too many traders and investors recognize the pattern, and are clinging to it as a beacon of hope; second, the pattern developed over a very short period of time (about one month) and the price range in which it is formed is very broad (over 150 points on the S&P). This leads us to believe that this developing pattern could be another head-fake that takes the ever so anxious bulls on for another ride down the slope of hope. 

So be careful of the technical chatter of this well-known and well-recognized pattern emerging, as we believe that it could, in fact, be fool's gold. 

Here's the Nasdaq and S&P charts...