While the action isn't entirely negative (yet), there is nothing overly encouraging since Thursday's big-bang blow-up reversal. If we are unable to resume to the upside by the end of today's trading in the US, I'll argue we'll break to lower-lows, probably in short order.
We know the fundamentals are negative, to say the least. A return to negative technicals leaves little hope for the immediate, near-term. I've cut back the number and size of positions here and I'm scaling into an SDS hedge for now, protecting the remainder of my holdings; I'm presently market-neutral.
Thursday was perhaps another case of too-far-too-fast, bear-market rally action and subsequently, today is key. After closing ugly on Friday, another lower close now and I think then a retest of lows is greater than 50-50. At the same time, if we do stage another retest of lows, I would put the likelihood of holding previous lows at less than 50-50.
In other words, if we don't catch a bid right now, I'd argue we'll purge to lower-lows, shaking the tree once more before beginning a substantive corrective rally.
This then is an exciting moment for Mr. Market. Blow to lower lows now and we'll see selling become emotional. And as I was arguing last week, the high volatility still in the market indicates the retracement rally, once it gets going, will be considerable; thus enabling a reasonable, best-exit for the 'stuck' among us, or a reasonable counter-trend, long-side trade for the rest of us. That view here has not changed - we'll see a substantive corrective rally, which could last several months and retrace anywhere from 20-66%.
The only question for me at this time is whether we have begun the corrective rally already or not. Not being sure, I'm trying to play it safe. Once more certain we have turned the worm, I'll play in long-only portfolio mode for as much of the retracement duration I am comfortable.
Beyond that point, which is too far out to really plan for, I would expect less volatility, lower (and lower) prices and a lengthy bull market in apathy.
Below is a look at the corrective rally which began in mid-November of 1929 and ran until mid-April 1930. The Dow corrected higher 52% at that time. As I mentioned, we don't have a large data sample for market crashes, but the point here is that the early corrective retracement, coincident with high implied volatility, is the strongest bounce to be expected for some time.