While it’s true that Apple (AAPL) is our main focus in the Wilderness, it would be fool hardy to ignore any opportunity to make some hay, especially when it’s a clean cut setup like the one that produced today’s rally. The setup wasn’t with AAPL though, no, it was with the indexes, particularly the Nasdaq.

So, I was looking at the daily charts of the three main indexes that I follow, the S&P 500 (SPX), Nasdaq (COMPQ) and the Dow Industrials (INDU). And I noticed that in the past few weeks, with all the volatility we’ve had, the charts were plotting what looked like steep falling wedges. A falling wedge is a reversal pattern. And believe me, I’ve had an ultra keen eye out for any kind of reversal lately. Now what really makes this pattern is an accompanying positive divergence with an oscillator like the MACD. But it could be with another indicator like the RSI or Stochastics. In this case it was setting up simultaneously with the MACD and the RSI. Interesting. Whenever you can get multiple confirming indicators, that increases the potential that the pattern will play out as you expect.

I was focusing, or not focusing, on the Tech-heavy Nasdaq. The thing is, Bear rallies are often led by Tech and particularly by high growth companies, like Apple. And there it was, a falling wedge with a positive divergence on both the MACD and the RSI. I hadn’t seen such a clean setup for quite a while. But I was cautious and sent out a cautious email alert. You can never tell in Bear markets, things can look really rosy, and then wham, out of the blue, your pattern gets slammed!

So, if you listened to yesterday’s Wilderness podcast, entitled The 2002 Bear Lows Blues, you heard me lament over issuing a cautious email alert to the Wilderness members about this potential bullish setup that was forming on the indexes, only to retract it later that evening because of that hellish late session reversal we had. I was really bummed, because it was the first half-way decent long setup to appear for a long, long time. And then, at that eleventh hour, the markets tanked. It was like a thumb in the eye.

What was that huge drop at the end of yesterday’s session anyway? There was no news, no indication whatsoever that we would or should drop so violently, and in such a short time frame. Three percent in just 15 minutes! I’m sure there are many cogent explanations for that drop, but I can only reconcile one. It was the primordial scream of the Bear, the screech of capitulation. The one last show of teeth, that last swipe of the claw, before the end. The Bear knows that its time is near an end.

Alright, let me clarify. I’m not saying this is THE bottom. What I’m saying is that this appears to be at the very least a near-term bottom. Just look at all the evidence. But before I get into the evidence, I want to talk briefly about the things that define a typical Bear bottom. Something we call capitulation. But keep in mind, in the past, capitulation events usually occurred in a single day.

And that day starts with a skin curdling gap down, a falling advance-decline line and a spiking VIX.Oh, byt the way, in past capitulations the VIX never really got much higher than the mid 30s. Ok. Then at some point during the day, usually after lunch, when all hope seems to be lost, there’s a sharp reversal. The market rallies, the VIX retreats plotting a black candle with a long tail, the Advance-Decline Line reverses on big volume, and what’s left is a very bullish hammer candlestick, sitting well below the lowest low of that Bear market. Then a sustained rally begins.

Ok. So have we had that skin curdling gap down? Yes, about four times! Have we had a spiking VIX? Yeah, about six times, each time higher than the next. We don’t even remember the last time the VIX was in the thirties, we’ve been hanging out in the stratosphere flirting with 80 and 90! Well, what about the Advance-Decline Line reversal? Well, unfortunately it never really happened during one of those spiking events, but it’s happened on several other occasions. What about the bullish hammer? Oh, those, we have so many bullish hammers you could start a hammer farm!

So we have all the elements, just not on a single day. No, our capitulation event has decided to grace us with an extended stay, like the annoying relative that just won’t go, for two friggin weeks! Oh my! So, like I said, we have evidence of a bottom, but the evidence is pointing to something that has no parallel in modern history. Possibly the closest market action we can compare this to is the crash before the Great Depression.

So, are we at the bottom? I have no Idea. But what I am fairly confident of, is that we have at the very least, a near-term bottom. And we’ll probably see a rally from here. So, I would say the best course of action to take is to watch to see if this rally has some legs. Watch the charts, the MACD. Check the different time frames, the weekly and monthly. Are they falling into place as well? And if all looks well, then we start buying on weakness and selling on strength.

The Investor in the Wilderness Podcast

That’s right, many of the Wilderness posts are now also simulcasts as podcasts. You can subscribe to the Wilderness podcast on iTunes Just Click here, or click Gyasi the Ridgeback to the left. My goal is to produce a podcast prior to each trading session that helps prepare Wilderness Investors, and one on the weekend that will cover a variety of topics. Listen to a few of the episodes, and if you like it, then subscribe and leave a review.