Despite the Dow breaking to new lows, there were a number of positive signs on Friday that could indicate that a bear market rally is just about to get underway.As pointed out by our friends at Dorsey Wright, the Nasdaq has remained above its November low of 1,295, and the S&P 500 is also just above its November low of 741. And Dorsey said its NYSE Bullish Percent took a big hit on Friday, falling 5.6% to 26.4%. But this is well above the November lows of 8% and they said it is "exactly what we want to see in a re-test with individual stocks holding up better than the indices."
I would point out that virtually all of the internal indicators that I've depended on for years are now grossly oversold, and the sentiment numbers show more fear than at any time since the November lows.
For example, the American Association of Individual Investors' bullish/bearish numbers show that 56.72% of members are bearish versus 21.64% bullish. This compares favorably with the all-time high bearish figure made on Nov. 20 of 57.14%.
You will recall that Nov. 20 recorded the last closing low for the major averages, followed by a new intraday low on Nov. 21, which turned out to be a key-reversal day and was followed by a 1,500-plus rally for the Dow.
If, however, a rally does not materialize this week and the S&P and the Nasdaq fall to new lows, then a new leg will be added to the bear market. But traders should be alert to the high probability of a violent bear-market reflex rally with a Dow target of at least 8,400.
One of the stocks that has fallen recently due to profit-taking is Corinthian Colleges (NASDAQ: COCO), but its strong chart and long-term outlook makes it my trade of the day.
Sam Collins is a contributor to OptionsZone.com.
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