Ugly action and it's probably not done yet but we're getting there.

Poor job numbers was the catalyst that took us lower but I think we were going to head down anyways. Every rally attempt I've seen lately has looked suspicious and appears mainly the result of short covering. The euro was the tell....it was weak despite Wednesday's and Thursday's rally. Coming into Friday the Euro was right at its 52 week low on the verge of a major breakdown and obviously that has now happened.

It seems apparent to me that there's going to be more shoes to drop in Europe and this crisis is going to drag on some more. Eventually we are going to hit a point where the market discounts the absolute worst and we bottom even before all the issues there are resolved. I don't think we are at that point just yet. Yes, there's still very encouraging bullish signs building up in the market which I believe will ultimately lead to an important bottom but I've seen my fair shares of meltdowns and I've learned that if the market acts in a way that suggests it wants to go lower still, it's best to ignore contrary signals no matter how strong they may be. Once you see the market act in a way which either suggests a) exhaustive panic selling followed by a reversal or b) a clear mutli day or week reversal with bullish market action (simply going up doesn't necessarily constitute bullish action) then it would be wise to listen to the contrary signals.

Using market sentiment is very much an art as it is a science. Just what constitutes an extreme in bullish or bearish sentiment depends on the circumstances. For instance, in the fall of 2008 our financial system was literally collapsing. Therefore a high degree of bearish sentiment is only naturally to be expected. I saw a lot of "sentimenticians" get run over in September 2008 trying to play the bullish contrarian because they noted how bearish sentiment was similar to that seen at the lows of the bear market in 2002. The mistake they made was that they didn't consider the differences in the contexts. The financial landscape was far direr in the fall of 2008 compared to the lows in 2002 which therefore required an even greater extreme in bearish sentiment for it to be considered "too bearish". We did eventually get to that point when everyone including my grandmother (literally!) was bracing for a depression.

Given what I just said above, it's logical to assume that based upon what we are experiencing now in Europe we will likely need to see sentiment register bearish extremes that exceed what was prevalent at previous correction lows of the past 12 months because the circumstances of this correction are more serious than those of which occurred previously.

These sorts of contagions pose a systematic risk to everyone given how interconnected economies around the world are. It's not as bad a situation as in 2008 because it's primarily European Banks that have direct exposure to PIIGS debt whereas in 2008 most banks around the globe it seemed had direct exposure to the failed mortgage products and institutions of the US and the US is the leader of the global economy. In addition, the economies around the world were already weakening well before the meltdown in 2008 happened whereas prior to this crisis, the economies had been strengthening.

This crisis could simply only be an aftershock to the financial earthquake that happened in 2008 as opposed to a new leg in the crisis of 2008 which the bears would have you believe. We are going to find out which path is taken before the year is over. I think it's the former but until the market confirms what I think I have to be prepared for the possibility of the later. Stubborn convictions will be the death of you in this game. Just ask any bear last year and early this year. Many of them got wiped out and most that still remain are probably crippled and are still in the red even despite this drop (the funny thing is, based upon what I observe a lot bears missed a great deal of this move down covering way too early and getting whipsawed).

The market is intermediate term oversold but only mildly ST oversold (it was ST neutral coming into Friday). Considering the damage today, the put/call ratio was far too low which suggests further downside in store. The market continues to trade "broken" with wild volatility and euro making a fresh 4 year low. The euro has been a leading indicator which suggests this move down isn't over yet.

I've noticed there have been too many bottom picking attempts by weak handed technical types. What I would like to see is a breakdown below well known support levels, moving averages ect, which causes complete bullish capitulation from the weak longs. Of course, the market often doesn't give me what I want. Instead we could see yet another dead cat bounce...even a huge one back above 1100+. The wild volatility makes it difficult for one to try and bet on a further decline. This game of chicken between traders as I like to call it ensures that the market will drop in a way where only a minimal amount of people can capitalize. It will do this by first squeezing a lot of shorts if the short side gets crowded before heading down, just like it did mid week. Notice how cruel the market was by closing above 1100 on Thursday probably triggering a bunch of buy stops only to gap down big the next day not allowing bears that got stopped to get a comfortable entry point. That's the meat grinder folks and that's why I often refrain from day to day or intraday trading and stay in cash or hedged if ST bearish.

Probably about the only bullish thing about today's decline was that there's now a nice gap in the chart which suggests the market will fill at some point. I'm still watching and waiting on the sidelines but getting antsy….