How Oversold Can a Bear Market Get? If We Don't Bounce Soon, We May Find Out

Here are the major indices. They aren't much changed from Friday other than the bullish reversals put in by the Nasdaq and Russell 2000 are no longer bullish. We're still extremely oversold, but I am starting to think that if we don't start to rally tomorrow, or at the latest Wednesday, that this market may just start rolling over once again, even with the oversold conditions. I have never traded a bear market before this one, so I really don't knowfrom experience how oversold a market can get. It seems to me like we are pretty stretched here. But I do know that the VIX is nowhere near extremes, and we still haven't seen any real capitulation-type action, so perhaps the market can get even more stretched than it is already.

I am guessing that right now, no one wants to be holding stocks come Thursday if the EU has the guts our Fed lacks and does raise rates, so perhaps that will lead to more selling. I am still not discounting a bounce, not in the least - I just think it needs to come soon, because there seem to be a lot of people expecting it. If it doesn't come soon, perhaps people start getting really scared and the selling accelerates. Oil has to fall in my opinion in order for a bounce to occur right now. Based on the reversal today, perhaps that can happen. As long as the USO holds $113, I wouldn't get too optimistic if I was an oil bear.

Major Indices

Here are the two shorts I took at the end of the session today. I am a bit worried because we are still so oversold, but these charts have rallied recently so I don't know if the conditions will affect them as much. At least I hope they won't. I will keep my stops pretty tight.

DRYS, CPLA

Speaking of oil, I saw several stocks having what could be considered exhaustion gaps or parabolic climactic action. I've seen this before, though, and it hasn't really meant anything, so who knows for sure? Again, the market's only chance here is for oil to drop significantly. If the EU raises rates, the dollar will fall even more, which is not the best recipe for falling oil prices.
I don't know that I would short these, but I will be watching them, mainly GDP.

HK, GDP, XCO, GMXR

Here are some of the shorts I am watching, either now or on a little bounce. I think I am just going to play the chart rather than focus on the overall market - both of the shorts I took today had already bounced and that's why I took them. It is certainly very, very risky to short here, so I would make sure you have an exit plan in case we do finally get a big, short-covering rally, and I would keep my stops tight. Before today, I was thinking the chances of a rally versus more selling was probably 80/20. But after today's poor action, I would put the chances closer to 60/40 or 50/50 that we just keep heading lower here, regardless of the oscillators and indicators and stochastics and others. I really don't enjoy getting stopped out of positions quickly out of entering them, but I also don't want to be sitting on the sidelines if we drop another 50 or 100 points on the Nasdaq, either. Right now, I think you have to weigh those two points of view against each other and decide for yourself what to do over the rest of this week.

MR, NCTY, SOHU, JST

SID, AKS, CRM, LDK

GNK, ESEA, TOL, MDC

All Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

That's about it for tonight. We'll see what tomorrow brings us, but a break below 2290 on the Nasdaq or 1272 on the S&P 500 could lead to more selling, taking us down another 25-30 points on these two indices. Those levels are very close to today's close. That oversold bounce better happen soon, or I might just find out first hand how oversold and stretched a bear market can get. Be careful, because we are at a difficult point here. Best of luck Tuesday.

Tags: AKS, SID, HSC, CRM, LDK, CPLA, DRYS, MR, NCTY, SOHU, JST, GNK, ESEA, TOL, MDC, HK, GDP, XCO, GMXR, EOG, RIG, APA, MMR, CRZO, Nasdaq, Dow, S&P 500, Russell 2000