After a near perfect setup for a capitulation bounce the markets are beginning to roll over again. There was no follow through to the sharp rebound that started at 11:50 and a Dow drop back below 10800 would probably sour any remaining sentiment and start a new round of cascade selling. We had the perfect capitulation setup but up volume barely showed an uptick and we are still showing a 10:1 imbalance of declining over advancing. The number of advancing stocks has risen slightly to 1235 compared to 5398 declining but the change was insignificant.
The failure of a potential capitulation bounce would be very negative to the overall markets. This may just be a period of lunchtime consolidation where traders are biding their time and waiting to see if the morning bottom is going to hold. I exited my longs when the rally failed but remain ready to reinstate them if we get an afternoon bounce. Because of the bounce failure we now have a confirmation point for any afternoon bounce. Should the indexes rebound and surpass the 12:50 highs it would generate additional confidence and could seduce more buyers to leave the safety of the sidelines. This could still be a rebound day but the market has to prove itself now before we commit to new long positions.Jim Brown