The bears have a chance to take complete control, as the big decline on Thursday has pushed the major averages to the very bottom of their support area. Every excuse and reason the bulls had has pretty much been exhausted. There really isn't much room left, for any further decline would constitute a downside breakout, which could lead to a really ugly fall. I say "ugly" because there has not been any capitulation in this market so far (even though $SPX is down 60 points since the first of June). When traders finally panic and want to all get out at the same time, capitulation occurs, but it's an ugly scene as the market careens downward. That scenario is dangerously close to becoming a reality. Figure 1 shows the current status of $OEX, which closed in a virtual dead heat with the yearly lows. $SPX and QQQ have already closed at new lows for the year. Only the Dow remains above its lows, but not by much.
Before leaving the topic of index price action, it should be noted that this market continues to unfold very much like July and August of 2001. At that time, when the market finally did break down, it immediately rallied back above the breakdown level -- giving false hope to bulls and making it look like a false breakdown. However, then a severe decline started -- taking $SPX down 100 points in two weeks (all before 9/11/2001 occurred).
Equity-only put-call ratios continue to rise and thus remain bearish. The standard ratio looked like it might try to roll over to a buy, but did not. However, it is at yearly highs and thus would be considered oversold. The weighted ratio, while continuing to rise bearishly, has not made a new high and is thus just plain bearish without being oversold.
Market breadth improved during the 5-day rally that culminated on August 2nd. In fact, it improved enough that buy signals were generated. However, the breadth buy signal has been canceled by the negative action of the last few days. This implies that the 5-day rally was probably nothing more than an oversold bounce.
Finally, volatility indices ($VIX and $VXO) have moved to yearly highs. This is a bearish development. We would now expect $VIX to continue to increase while the market falls -- eventually peaking at some higher level (at least 20, but perhaps much higher). With volatility finally moving higher, we are at least seeing a bearish signal from this previous lone holdout amongst our technical indicators. This will "solve" the complacency problem of which we have spoken in recent weeks -- instilling some fear into the bulls, who until now have been operating with an overly positive attitude, ignoring downside risk.
Eventually, we could see all of our indicators line up as solid, deeply oversold, buys -- but that is somewhere down the line. Right now, the weight of the evidence has turned decidedly bearish again. The bulls could theoretically try to halt the decline immediately and "save the day," but that doesn't seem likely. So, in summary, if $SPX closes below 1076, that will eliminate the last vestige of support and a new bearish leg will be in motion.
