Swift correction: bounce watch begins

Telling signs of market weakness manifested itself this week in the equity market's correction. While the intermediate-term remains up, a sharp, high-volume sell off underscores fear. VIX, which had exhibited complacence as price fell significantly below its EMA 34 (an indicator we watch closely), exuded warning signs of a market top (along with a Put/Call ratio in the .60-.80 range, which in the past had been accompanied by market sellofs).

Now, bullish percentage readings, NYMO and stocks trading above their 50-day moving averages, all have corrected sharply. A little further to go, and these indicators will settle at levels that in the past have preceded market bounces. With the damage done in equities, we will look to add to short positions on a bounce, and may switch to long (for a quick trade) should we see a selloff early next week accompanied by an intraday recovery. We expect volume to be heavy.

Click here for the current Baseline Analytics Market Tour on Stockcharts.com.