"At the close on Friday, the Signal Strength of our model fell from
11 to 7. This pretty much coincides with our feelings on the market.
There are an awful lot of negatives for the market here, and you
have to search awfully hard to find any positives.

Probably the most troubling thing about the selloff in September was
that the bulls couldn't muster any sustained rally, even when the
market became extremely oversold. Since the current bull run began
in late 1994, the market has had several traits that we have seen
played out over and over. One of them was that when the market became
very oversold, the market rallied. In fact, in almost every case
when the market hit the oversold extremes that we saw in September,
an intermediate term bottom was at hand. This just hasn't been the
case since the market topped at the end of August. Throughout
September, the market grew more and more oversold, first on a price
basis and then on an internals basis. But the oversold conditions
just did not generate any enthusiasm from the bulls...

Which brings us to another big change. For the last five years, the
rallies lasted weeks and the selloffs lasted hours. Oh sure, we
occasionally had selloffs that lasted a few weeks, but when the
bounce did come, it lasted a while. Now this seems to have done a
flip flop. Since the beginning of August we have seen the bulls
mount several vigorous rallies, but they are only lasting a day or a
day and a half. And meanwhile, the selloffs have been grinding on
for days.

Here is another interesting measure of the market that might be
telling us that something *is* different this time. We took a look
back at some of the recent sharp selloffs in blue chip tech
bellweather Intel. Since the beginning of 1998, there have been
quite a few...in fact we counted six selloffs prior to the current
debacle. In all of those, Intel sold off between 22% and 29%. In
fact, looking at these results, buying an Intel drop in that
range looked like a sure thing. But since it hit an all time high on
8/31, Intel has dropped 44.5%, well out of the comfort zone it has
been in for the last couple of years! Keeping an eye on
"bellweather" stocks is an old tradition on Wall Street, and this
bellweather seems to be telling us that the current selloff very
well might have a different character than the ones we have seen
over the last few years.

OK, let's get a little more specific on the current market. First
off, the market was very well setup for this downdraft. Way back on
9/5, just one trading day removed from all time highs, we warned of
broken rising wedges on the Nasdaq and the SP500. We also warned of
bearish divergences on all of our internals indicators. Those
factors, combined with the bearish seasonality in the month of
September, had the market setup for the current fall.

So what has happened? From the closing highs on September 1st, the
Nasdaq has dropped 13.3%, the Dow has given back 5.2%, and the SP500
has sold off 5.5% (incidentally, this leaves all three indexes in
negative territory for the year). So far the drop has been quite
orderly, even dull at times. There has been very little panic
selling, the market has just kept pushing lower. There have been
very few bright spots in the market, and the market internals have
been confirming this move all the way down.

As we mentioned above, the market has become extremely oversold,
both from a price standpoint and from a market internals standpoint.
But those oversold conditions have only generated brief one day
rallies. And each time the bulls put together a rally, the sellers
come out in force and push the market back down.

Which brings us to the market's immediate future. This coming week
looks very important, especially Monday and Tuesday. Last Friday we
had another nasty selloff, one that took the market right to the
brink of some very important support levels just below Friday's
close. Unless the market starts heading higher early on Monday,
those support levels are in danger...and if they are broken, the next
target on the downside would be the *big* support levels at the lows
of the last couple of weeks. Those levels are at 3614 on the Nasdaq
Composite, 1419 on the SP500, and 10567 on the Dow. If *those* lows
do not hold, we think that the selling will accelerate. We suspect
the bull's nerves are starting to get worn pretty thin as we have
repeatedly seen rally attempts fail since the August highs. If we
breakdown much further here, we suspect that quite a few more bulls
will be throwing in the towel and things will really get ugly.

Of course, the market is overdue a bounce here...and it could get
one at any time. However, right now we will be very skeptical of any
rallies, and we are not looking to buy any dips."

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