Caught in a Downtrend

 | Aug 19, 2011 | 4:48 PM EDT
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Earlier this week I said the only thing you need to know about this market is that it's caught in a downtrend, and a very ugly one at that.

Since the bottom in March 2009, we have been spoiled by very quick recoveries just when it looked like we were going to break down.

This time, unfortunately, the downtrend has developed in textbook fashion. We had a classic low-volume bounce following the massive breakdown in early August and rather than go straight back up, the bounce failed miserably. It's what you typically expect when there's a sell-off. But folks have gotten used to those V-shaped bounces, so the rollover has been especially painful for those who have come to expect these corrections to end quickly.

The big question is whether the lows hit on Aug. 8 and Aug. 9 will hold. Those levels are so close that they have to break first before seeing a lasting low. There are still too many folks hoping we've already seen the lows and need to wash that optimism out completely by cracking further. That should help produce the sort of capitulation needed to get closer to a turning point.

I don't want to spend too much time focusing on possible turning points because it's far more important to protect capital than try to catch the bottom. I don't know how many times I've heard this week that you should be snapping up all these great bargains. Most of the bargains have become even better bargains, and there is no telling how much cheaper they will eventually become before this market turns.

Markets will almost always trend further than you think reasonable. For the past two-and-a-half years that trend has been mainly to the upside, but now we are seeing that phenomena to the downside and it is feeding on itself.

I'll be working on my shopping lists this weekend for when the market starts to act better, but I don't expect to be too active for a while. We will have to be ready for some quick oversold bounces next week, but the key word here is quick. The way this market is acting, upside won't last long. It is going to take time to turn the tide.

Have a great weekend. I'll see you next week.

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