What is behind us, the worst OR the best?

The talking heads on the Wall Street have been asserting us for months that “The worst is behind us”, they also told us many times that banks/brokers had finally done the write-offs. Considering how reality has been blowing away all the smoking mirrors on the Wall Street, we might just have to consider the possibility that the opposite answer might be closer to the truth.

Bulls, especially the tech bulls, tried very hard last week to stop the recent slide, but last Friday’s precipitous sell-off on heavy volume has not only squashed bulls’ hope but also drove bulls to the edge of a cliff.

On Weekly Charts: DOW led the major indices towards the bearish territory. Positive momentum flipped to the negative side for the first time in 11 weeks for the DOW while declining for the 4th straight week for other indices; MACD crossed and turning downwards for the DOW with other indices following the same path; overall candle and volume patterns remain bearish since May; stochastic and RSI(2) favor more near term downside;

On Daily Charts: the bearish short-term MA bow-tie formation now in full swing for all major indices; negative momentum started to rise again; both DOW/SP500 breached last week’s lows and key support levels with DOW now only about 100 points north of the March low; MACD in solid down trend formation; candle patterns remain firmly bearish; stochastic/RSI2 in oversold for DOW/SP500; NASDAQ/Russell2000 managed to close above last week’s lows after the failed attempt to reclaim their MA50.

Thoughts and observations about the current market conditions and near-term outlook:

1. Technically speaking, the market is at a crossroad right now: if the market goes down next week with NASDAQ/Russell2000 following DOW/SP500 footsteps, the MACD and momentum would flip to the bearish side for all major indices. That could mark the beginning of a lengthy decline as the weekly charts suggest that the market will need a minimum of 2-4 weeks before reaching the oversold levels that were associated with the previous bottoms in Aug’07, Jan’08, and March’08, which means that re-testing of the Jan/March lows will be inevitable.

2. VIX has been overall indifferent to the recent market decline: even as both DOW/SP500 solidly broke their last week’s lows, VIX remains well below its last week’s high. The muted reaction in VIX simply indicates that there is simply not much a fear in the market right now. The VIX behavior collaborates well with other facts, such as the increasing of the long positions by the big boys (as seen in the latest COT data).

3. There is a consensus that market has seen its true bottom, solidly manifested by the double bottom formation (Jan and Mar’08 lows). Consequently, many seem to position themselves for an all-out bottom fishing should the re-testing of the bottom arrives in the coming days. That kind of the mentality might well explain the muted VIX movement in recent days. However, if you study VIX chart, you will find that VIX spikes to very high levels with any meaningful bottoms, such as the Aug’07, Jan’08, and Mar’08. The relatively low level and lethargic movement of VIX right now is UNLIKELY indicative of a bottom of any significance. In other words, you won’t see a real bottom until the fear turns into panic as the Street is soaked in blood.

4. Since I am on the bottom testing topic, I want to point out that while the double bottoms formation is common and often reliable, the triple bottom formation is rather rare. In other words, if the market breaks the current double bottom formation, the consequence of the nasty surprise may be dire, especially for those who are convinced that the bottom is in.

5. I expect the tech sector to hold up a bit better than the rest of the market before the RIMM ER. Speaking of RIMM ER, it comes at an extremely crucial time. Right now the market has a high hope for RIMM ER and its recent price movement has reflected this. A better than expected RIMM ER may just give tech bulls enough jolt to regroup and save the market, but a weaker than expected RIMM ER will destroy the safe heaven for the tech bulls and send NASDAQ down to its March low in a hurry.

6. Take a look at GE’s chart if you want to know the outlook of both US and global economies.

7. Watch GOOG, BIDU and AAPL for what’s coming in tech sector, if these big name tech stocks break their recent lows, it is a kiss and good-bye time for the tech bulls.

8. Next week’s FOMC meeting is probably going to be the most irrelevant one in recent months because the Fed is now really between a rock (troubling financials and economy) and a hard place (raging inflation), and all it can do is just lip service.

9. There are now concrete signs that the raging inflation may finally choke down the miraculous economic growth in key emerging economy such as China and India. If that trend gains more traction in the coming months, it would not only dashes the hope of a quick turn around for US economy, but also deliver a lethal blow to the parabolic moving commodity and energy sectors.

I would like to ask those who consider my weekend market analysis like this one valuable to spread the words about this blog. This might be the last time that I would really spend time to go through many charts and readings to write up an in-depth weekend market commentary if I don’t see a meaningful increase in the readership in the coming days: I have been really pushing myself, but the efforts may not be worthwhile.