Markets got the bounce that I felt was a strong possibility but the bulls haven't done much damage to the bears so far. We are slightly higher than where we stood about 10 days ago. The difference however is that 10 days go the VIX had surged to about 28 whereas now it’s just under 22. That's bearish because it shows there is less fear now compared to 10 days ago when the market was at around current levels. The lack of "jump" in the VIX when the market is showing weakness has tended to be a reliable contrarian bearish signal in the past signaling a lack of worry.
With the market just about working off the ST oversold condition to neutral with this bounce; the bears have their chance here to do some damage in the coming days. Will they show some game or will the bulls bring the market back all the way to full overbought like they have been doing most of the time since last March? We have a couple of big economic reports coming out on Thursday and Friday and so there could be some fireworks.
Now here's the way I see things... A sharp drop lower in the coming days would likely light a fire underneath the ass the of VIX and push the main indicators I look at into giving the "all in" buy signal. If we just simply keep going higher back towards 1150 then it's very likely we will revisit the lows sometime in the weeks or months ahead because we didn't see the typical "market action" that you see at bottoms i.e. there wasn't enough fear. For instance, the bounce which began on Monday started with a gap up and never looked back after the market had been hammered quite a bit in the days prior. That very much smells like a reflexive dead cat bounce...there was no "white knuckle fear" at the most recent low in my opinion. On the flip side, look at how badly the bears had to suffer before they could profit from the latest drop. "Chinese water torture" was how I described it. Bulls need to be squirming in a similar fashion IMO.
The current situation of the market reminds me a lot of that in late June. The market had bounced for about 1 week after rolling over from an IT peak. The VIX was acting bearishly as it was now i.e. it collapsed very easily on just marginal strength. Then in July we got the final stab lower in the market which made everyone brace for the H&S top breakdown which turned out to be one hell of a bear trap. So, if we follow that script then we could still see the market grind a bit higher for couple more days before we see a retest or break of 1072. Now, keep in mind that rarely do markets play out the exact same way as they did in the past...history rhymes but seldom repeats. So, we could very well see such a downside move happen as early as tomorrow (Thursday) because the market has worked off the oversold condition close to neutral such that it now has "room" to go lower again.
The bottom line is that I feel the most recent low will be revisited again or broken whether it's in the immediate future or sometime later on in the year. It's not a slam dunk for the bears by any means because many of the IT indicators I look at are oversold enough to give the bulls the green light and we could power back to 1150 no problem. However doing so from present levels would be done with what I term "poor market action" and therefore a retest or break of 1072 would likely be deferred to later on the year. That scenario would fit in very well with the multi-month consolidation phase I’m expecting.
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