CALDEIRÃO DE BOLSA

SENTIMENT TANK: Filled up 4 points to 5% full of negative sentiment on Friday. The VIX closed at a low 21.6 but the Put/Call Ratio expressed some fear rising to 1.08.

SHORT-TERM: With the VIX having moved between 21 and 22 for 30 of the last 34 trading hours it makes no sense to try to interpret its movements on an hourly time frame.

MID-TERM: Progressed 5 points to 32% in its decline phase. However, as I've mentioned on more than one occasion lately with the tank rippling around in such an uncharacteristic way the gauge is not telling us anything meaningful at the moment, it's merely marking time until there is some momentum to be measured. Our Confidence Diffusions Index (CDI) is at 0, expressing the trendless state of the tank.

LONG-TERM: Remains unchanged at 95/5 for the 4th straight week with 0 confidence.

BOTTOM LINE: The market's consistent strength in the face of too-bullish sentiment must be taken to be bullish until we get a bona fide sell signal. The tank is steadily normalizing itself to adjust to the market's recent range. A sell signal would now show the tank filling up to 20% or so. The tank, our 0 confidence readings, and the weekly gauge are describing the market better than the mid-term gauge at the moment. The liquidity coming into the market most likely from institutional sources is overwhelming and non-normal. Ultimately such non-normal periods exhaust themselves. This one will be no different. We'll certainly let you know when we see that happening.

Interestingly, SPX 974 becomes the crucial level. Not only is this the 50% retracement level on the big weekly move down (see the third chart above), but it's also a perfect 23.6% retracement of the move down from the peak (another Fib number), and it's a 61.8% retracement of this latest move up. It's a "Fibonacci cluster." Plus we can see that there has been prior support here at SPX 974 on the prior down move. For some mystical reason, SPX 974 is important.

The point of all this mumbo-jumbo is that while the markets are chaotic, dynamic systems, they are attracted to their own sense of order. There are specific levels where investors instinctively recognize and react, and this tends to occur at these harmonic levels, on all time-frames. There is order in the seemingly random movements of the herd.

This big move up, while it has been large, has not deviated from the bear market pattern of the last 3 years. Indeed, it is a perfect set-up for a climactic descent to new lows. We don't have to go over again how frothy bullish sentiment is. All the pieces of the puzzle are coming together.

Indeed, the pendulum of sentiment is in a position to swing back against the bullish majority in a big way. There hasn't been this much stored up energy at any other point in the bear market. The weekly MACD on the VIX serves as pretty good proxy for this mythical pendulum of sentiment. As you can see on the blue line on the chart below, there is a lot of room for the pendulum when it starts swinging back. It could really do some damage.

This would be a natural place for the market to turn back down. But if the SPX can pop over this 61.8% line, and go all the way over 1000, then we have to look for another trip back to the recent highs, and perhaps all the way to the 1021, the exact weekly 61.8% level.

We can also draw another Fibonacci line on that latest move up, and see what that looks like.

We're now in a crucial interpretive zone. It's really no surprise from this big picture view that the markets have had trouble making much headway over SPX 1000. Those recent highs should hold, if the bear is still in charge and prices are going to get another vicious mauling.

Let's continue on with a look at the hourly chart with this same Fibonacci vantage point. A look at the move down from the peak shows the market has done a perfect 61.8% retracement of that move down.

In 2002, we had the big breakdown below those 2001 lows into the bottom in October. Now we're in the fast and furious counter-move back to the upside. So according to this 61.8% doctrine, where would be a good place for this upside counter-move to end? Remarkably, right at the recent highs at 1015 -- very nearly an exact 61.8% retracement.

There is lots of repeating structure in this pattern. Most obvious is how the market likes to come back up to the spot of the breakdown, "testing" back to the upside.

A market idea that is very familiar to devotees of Elliott Wave Theory and Fibonacci holds that 61.8% is an important market constant. Trending moves tend to re-trace up to 61.8%, before the main trend resumes. Often the re-trace is much less than 61.8%, but if the counter-move goes much beyond 61.8%, then the interpretive situation is much less clear regarding the trend.

So let's see how this looks on our bear market pattern. Back in 2001, the markets had the big breakdown to the post-9/11 low, followed by a big bounce, which was -- you guessed it -- an exact 61.8% retracement.

There has been a little-discussed but very obvious bear market pattern unfolding over the past 3 years. I've mentioned this before, but it's worth going over again.

The bear market waves have been doubling in amplitude and period. Of course it's not exact, but it's pretty darn close.