Like a bolt from the blue

Wow - last night I really thought the Dow would go higher today.  All the signs seemed to be pointing in that direction.  I guess when I'm wrong, I'm really wrong, to the tune of a screaming 280 point dive that left the entire Dow in the red, along with nearly everything else on my watchlist, and an A/D line of worse than 1 to 5..  And aside from the magnitude of the decline, it had a few other really nasty features.

First, unlike recent big drops, most of the action did not occur in the first 2 minutes of trading.  This was just a steady downhill drumbeat all day long.  Second, just as we cut above the 12,450 resistance level yesterday, today we not only crashed right back through it, but also support at 12,350 before finally coming to rest right at the lower Bollinger band at 12,290.  And third, we're not only right back in the descending RTC channle that I thought we had escaped yesterday, but we're all the way down to its lower edge.

And the amazing thing is that even after today's sharp drop, the indicators are still not particularly oversold.  Indeed, I checked out the Morningstar Market Fair Value Indicator and while it came down a bit today, it still stands somewhat overvalued at 1.02, where fair value is 1.0.  And the Dow daily short stochastic went right back into a bearish crossover.

So we're now left with the third rally attempt in May ending in dismal failure.  So where does this leave us?  Looking at the bright side (if there is one), today's action was welcome because it lets us exercise the Golden Rule of trading: buy low, sell high.  It's been tough finding decent buying opportunities lately.  Today's sale on stocks should help a lot.  But I'm not sure the discounting is even over yet.

There could be some more downside left, judging by the VIX which took a big pop today but did not reach either its upper Bollinger band or particularly overbought levels on its indicators.  However, the futures are all pretty much flatlining right now at 1:45 AM, indicating that the worst may be over for now.  We might even see something of either a relief rally or a dead cat bounce tomorrow, depending on your point of view.

Either way, when Mr. Market goes off his meds like the last few days, my reaction is to generally stand aside and wait for him to calm down.  There's no point in trying to reason with the old guy when he gets like this.  I console myself that while the Dow lost 2.22% today, my losses were exactly half that.  Not that I'm ever happy to have a 1.1% down day, but taking heat is just a necessary part of playing this game.

I think tomorrow's action is going to be largely news-driven based on the economic news coming out in the morning, so there's no point in trying to call it tonight based on the technicals.  At this point, it could go either way.  Much as I'd like to sound the all-clear, it looks like there's still a chance for some further downside.  We'll just have to wait and see.