Seeking a tradable short-term bottom

No doubt the selloff that has taken the S&P500 down 11% through Friday reinforced sell signals in our trend-following system. Now that the downtrend is confirmed, the challenge is to identify a short-term tradable bottom to provide first a short term long trade opportunity and then an opportunity to establish short positions.

Our VIX indicator flashed an extreme reading Friday as VIX closed at 32 and well above its 20.5 moving average (an extreme gap we look for to help identify a potential market turning point).

Same story with the put/call ratio, as it too has reached a pinnacle that has in the past market a turning point in equities.  Note the peaks in Put/Call (red arrows) corresponding to the troughs in the S&P500 (green arrows).

Stocks have fallen so swiftly that a meager 5% of the S&P500 stocks trade above their 50-day moving avearge, levels not seen since the the Fall of 2009 (note however that the 3/09 bottom took that figure to near zero).

But the market trend indicators we follow are clearly denoting a downtrend, with first indicators flashing negative signals about 2 weeks ago. Note below our ratio of corproate bonds (LQD) to medium-term treasuries (IEF), with the red line flashing a sell signal. It will take a strong rally to turn such market-trend indicators positive.  

Markets can move swiftly to the downside as we saw last week. Even oversold readings as those noted above can turn more oversold very quickly. Reactions to the downgrade of US Debt could be the tipping point we will watch as the trading week begins.