This Decline Isn't a Selling Panic, It's a Buying Strike

A few signals are finally starting to reach oversold levels, but there's nothing to mark the extreme levels normally associated with more meaningful bottoms. 

As I was looking at the charts earlier, particularly the down volume to up volume ratio (chart below), it struck me that the market hasn't seen any terribly strong selling yet.  This seems to be more of a buying strike than a selling panic.  Usually, we would expect to see some type of capitulation to mark a low that will last more than a few sessions, but we've so far seen nothing of the sort.  As I stated yesterday:

What's interesting about this market is that it's managed to grind lower without reaching any extreme levels in bearish sentiment, or extreme oversold readings in certain key indicators such as the McClellan Oscillator (NYMO). As long as this situation persists, it is completely plausible for the decline to continue essentially unabated.


Below is the chart of the NYSE down volume to up volume ratio.  Note how most meaningful lows are coincident with significant selling.  So far, this decline hasn't even reached the selling levels of the April 2012 low.  This of course doesn't preclude short-term bounces, but it's hard to see an intermediate-term bottom forming yet.

This tells us that the real selling hasn't even hit this market; it appears the bulls are holding "long and strong" for the time being.  I've said it before: markets don't need tons of sellers to drop -- all they need is a lack of buyers.

Perhaps ironically, this is when the market is the most dangerous.  Few realize that crashes usually start when the market is already oversold, not when it's overbought.  The numbers are telling us that the real sellers haven't stepped in yet -- so it appears the decline is currently being driven primarily by short-term traders and algo-bots. 

This is a market ripe for an "event."  If things continue to muddle along and the real sellers don't ever step in, then the market will most likely continue to move in a reasonably orderly manner.  But if this market gets spooked by something while in this position, it could easily spark a panic wave.   

As I've said for the past couple weeks, the market is still in dangerous waters. 

Moving on to the projections, my intermediate term outlook has remained unchanged for the past couple weeks, and I've continued (and still continue) to expect lower prices for the bigger picture.

The question now is exactly how we'll get there.  Up until a couple days ago, the short-term targets were being hit perfectly... then the charts got a bit messy, and have stayed that way.  The chart below shows two potential short-term wave counts; one is immediately bearish, the other is short-term bullish.  Both roads are assumed to lead to the same intermediate term outcome, as shown above.

I'm favoring the count shown in blue and red by a very slim margin.  I have labeled the black count as the alternate, but there's really nothing in the charts to give me a reason to strongly favor one result over the other. 

I should also mention that there is a third option not shown on the chart below, and that's for a repeat of the fractal shown between black alt: ii and red (2) (called an "expanded flat").  I'm sorry the short-term charts are so messy right now.  Blame the market -- I don't make the charts, I just read 'em.  Things should become clear again soon.

In conclusion, it will be interesting to see if the bulls can get anything going here, or if the buying strike will continue.  As of this moment, there are some reasons to suspect a short-term bounce may be in the cards, but as yet still nothing to indicate a substantial bottom.  Trade safe.

Reprinted by permission; Copyright 2012 Minyanville Media, Inc.