Technical Analysis Rule of Thumb re Selling Climaxes

In order to qualify as a selling climax, stocks must NOT close below yesterday's closing price over the next 3 trading days. As the first chart shows, given the deterioration in the near term indicators tracked (momentum and MACD) and the fact that the short term indicator tracked (slow stochastics) is not in deep oversold territory (below 20), the odds are high that stocks WILL close below yesterday's close and the air pocket corrective phase we just lurched into will likely continue. The most pressing question is: does that mean something more than the long overdue healthy correction? No, for the following reasons.

The fact that we entered the correction with some degree of technical analysis weakness but not an overwhelming amount of it suggests the decline will be contained and not usher in a bear market. As the second chart shows, divergences between the S&P 500 and other key global indices (e.g. EAFE (EFA), Asia Pacific ex Japan (EPP), and Latin America 40 (ILF)) were evident (my "Sell in May and Pray" mantra) but not so pronounced to warrant ringing the bearish bell. Moreover, as the third chart makes abundantly clear, the Mega Trend HAS NOT reversed itself. Until price crosses both moving averages AND the 50 day crosses the 200 day AND both averages point southward, the bull market is intact. However, all this could change in the coming months as the following paragraph illustrates.

The next most pressing question then becomes: how low will this correction go? The market intelligence/technical analysis tools I use only provide direction not amplitude. That said, given all of the above plus history plus valuation considerations, the odds are that the decline will likely turn out to be a garden variety correction of 10 to 15% - this despite the dramatics exhibited yesterday and the unquestionably horrendous advance/decline data (> 10 to 1). What follows will likely be an attempt to reestablish the bull and it is in that rally that key signs of broad market strength must emerge - most notably global indices must improve their relative performance. If in the subsequent rally phase broad market participation does not emerge and further technical analysis damage does, then the odds for an end to the bull market will increase significantly.

Bottom Line: Correction not apocalypse now.