1. Overbought conditions in a bear market — expect a new down leg.
2. Oversold conditions in a bear market — “thin ice”, no solid foundation for price bounces.
3. Buying into a bear market is dangerous regardless of the bullishness of the chart.
4. Expect bearish conclusions to bullish chart patterns.
5. Manage long-term positions as if they were short-term positions.

The charts on Wednesday 2/9/22 did look promisingly bullish. After Thursday 2/10 morning’s big drop from the rising trend channel likely due to the CPI report showing accelerating inflation, price was beginning to make its way back to positive territory. Then it fell apart. The breakdown was exacerbated by St. Louis Fed President Bullard suggesting a full percentage point rate hike by July. So it was a double whammy for the market.

After the market closed on Thursday, we identified an downside initiation climax. A downside initiation climax tells us to expect more decline. We were churning this morning and losing ground. Then we got the news that the White House was expecting Russia to invade Ukraine before the finish of the Olympics. The market sold off in earnest.

A climax is a one-day event when market action generates very high readings in (primarily) breadth and volume indicators. We also include the VIX, watching for it to penetrate outside the Bollinger Band envelope. Climaxes indicate either initiation of a price move or exhaustion of the current trend.

Conclusion: When the market is correcting or in a bear market, we need to remember that bullish expectations should be tempered. Oversold conditions that you we see often in bear markets become “thin ice”, a poor foundation for an extended rally. That is what I forgot on Wednesday. Lesson learned.

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