We've all been sitting here moaning and stewing over the tremendous loss in the stock market in early August. When you step back and analyze the decline, you have to recognize that much of the "wicked" part of the decline occurred on only 3 of those days: August 2nd (-2.56%), August 4th (-4.78%) and August 8th (-6.66%). Those very sharp declines induced a huge amount of volume as the panic reached extremes. After all, if the market drops over 12% in three days, SURELY the world most be coming to an end.
As we've mentioned before, the over-44 reading that we received on the OEX Option Volatility Index (VXO) from that panic of August 8th was a great historical signal suggesting that day would mark the peak in fear, but maybe not the low of the decline in the index (S&P 500) itself. And then, based on this historical example, we projected a similar bottoming formation to the one from last summer, with a likely expectation that the chart formation of the index would take on a reverse head-and-shoulders pattern. That is all conjecture, obviously, and not something to "bet the house on," but so far, that is the shape the stock market has traced out.
So, if the market continues in this pattern, we would most likely have a right shoulder to endure before the bulls come back in charge.
Please see important disclosures at the bottom of this page.