Be patient

On Friday the market continued to act weak. I have to admit, the action is reminiscent of bear market behavior because in bear markets oversold conditions often get ignored like they have been doing. However, this sort of action can also happen during multi-week corrections in a bull market just like with the June-July slide we saw last summer which turned out only to be a multi-week correction and not a new bear market. According to Cramer there's liquidations from big mutual funds causing this slide. In addition I believe there may be a lack of shorts to squeeze. A lot of them who finally caught a top correctly likely covered after that quick drop to 1115-1100 expecting a bounce. Rydex traders continue to show lack of capitulation which confirms that a lot of traders got caught a bit flat footed here by either covering shorts too early or going long too early expecting a bounce and now they are holding the bag.

I suspect we see a similar type of capitulation observed at July lows. Remember when everyone was bracing for a downside break due to that head and shoulders pattern? There probably needs to be that sort of white knuckle fear this time around as well to mark the bottom.

Things I'm looking for to mark the bottom:

1)Rydex traders running for the hills exiting bull funds and piling into MM funds (so far they are only walking casually towards the hills).

2)AAII sentiment shows 2:1 bears vs bulls (So far it's 1:1).

3)A spike in the VIX towards 30 and the 10DMA put/call ratio hitting the high .90s or higher (VIX currently about 25, 10MA put/call ratio currently .91)

All of the above can occur as early as this week. I'll be watching carefully and patiently. We can certainly see a dead cat bounce here but until I see the above 3 I'd be careful chasing strength and be patient unless your holding period is very short term (1 day or less).