Worst drop since June 2011 and one of the worst 6 day drop

The last two posts I cautioned about a narrowing price range and internal weakness but the last post I was anticipating a resolution with a break out of the narrow price range would be... with caution... to the upside mainly due to the positive price reversal back up on August 12. Wow, was I really wrong on that one. The break out turned out to be to the downside... -11% in 6 days... one of the worst on record. The largest was -21% back in October 2008. With the SP500 closing below its 200 day moving average, it closed as the 3rd longest streak, 3.8 years above it 200DMA, before closing below it on Monday. The longest being 7 years from October 1990 to October 1997. So what now? Obviously, the stock market is extremely oversold on the short and medium term basis. Majority of my medium term readings are extremely oversold but several important momentum readings are now only crossing over between neutral and oversold... due to the nature of the narrow price range of the past 6+ months. Another question to ask is are we heading to a bear market? I don't think so. I believe we are only in a +10% correction mode which happens to correlate with the 200DMA record I mention above. With the 10% correction occurring on Monday it marked the 3rd longest streak without a 10% correction. I believe we are still in a bull market and while the stock market may still probe several percentages lower in the coming weeks I believe 6 to 12 months from now the stock market will attempt to break out above its all-time highs of this month.

Short term signals have worked well recently... we got oversold and a bounce yesterday.

The major indexes have been in a very tight narrow trading range this year. Rarely getting close to medium term overbought or oversold but the short term signals have been very reliable as the major indexes reacted to them very well. Yesterday, the stock market did reach short term oversold during mid day and rallied back up. Going forward the stock market have been in a long consolidation with internal weakness underneath. Eventually this should result in the major indexes breaking down hard or breaking up strongly. I believe we will eventually break higher. Whether this short term rally will be the start we'll see.