Wednesday we issued our crash alert because all 4 criteria were met for the signal, but the alert came after 14 trading sessions of market selling that saw the market regress 90 points (4%). The selling was even more significant in the Dow that experienced a 1000 point drop over that same time. When selling occurs in such an orderly fashion, the short sellers that are trying to profit from the drop get very comfortable. We wrote: We are in crash alert because all of our criteria have been met but the market is significantly oversold on the short term and it would not be out of line for us to see a relief rally over a day or two. We anticipated the bounce and it ended up being a relatively strong one as we saw 40 points on the upside.
The next few weeks will be absolutely critical to decide what October holds for investors. Stock market tops are a process and not an event. After key highs are hit, there tends to be a prolonged tug-of-war between bulls and bears that has numerous false starts that tend to look like double tops or key top retests.
We have been suspect of a good short squeeze to the upside, and we got it. The question now is does the S&P500 stop at our targeted retracement levels, or does the S&P go for a full double top retest of its highs, driven by technology leadership. To view our retracement targets we published, click here. We remain suspect of the big picture sustainability, but clearly the short term momentum has some gusto.