This market's volatility has been absolutely maddening and it seems like things are only going to get even wilder as we head toward the end of the year.  Remember when VIX spikes over 40 were big news?  Those days are gone as the 30 day MOVING AVERAGE of the VIX is at 59.  GM may not have enough cash to last the year, Iceland, Argentina, and South Korea have funding issues over the last month, and the jobless rate in the U.S. is at a 14 year high.  If any of you are into being a contrarian and being a hero, go ahead and call a bottom here.  As for me, I like to rely on the markets.   This is not your father's bear market

A couple of weeks ago, I wrote a piece saying that a bottom was near.  By that I meant a trading bottom at best, not THE bottom.  So far my indicators are not signaling a sustainable long term bottom yet.  There is, however, an argument that can be made for the continuation of this rally attempt, but outlook is tempered by another formation on the daily chart of the Nasdaq.

The following references are to the Nasdaq chart at the end of this piece.

The positive argument is the bullish divergences that have been in place in momentum oscillators such as the Nasdaq Momentum Oscillator (based on Nasdaq internals) and also the 14 period RSI (based on Nasdaq price).  These continue trending higher while the price action continues to muddle through a low volume rally attempt.  The drawback to this condition, however, is that is price continues to work off its oversold condition by merely churning sideways, that is the mark of an extremely weak market.  While the 889 point advance in the Dow in late October was a sight to behold, volume was mediocre at best, and the subsequent up days showed clear evidence, based on weak volume, that institutions were not participating.  One more positive that is often overlooked by those that do not fully know how to use the RSI, is that the RSI bounced off of the 40 level on Friday.  Notice that RSI in the bottom pane in red.   The 40 level is common support in markets exhibiting some strength.  Of course buying would need to develop rather quickly for the 40 level to hold, so we will watch closely for signs of a further rally attempt from here. 

Notice how the Nasdaq Momentum Oscillator (middle pane in blue) is nearing its August high while price can't even clear its October 14 high.  Also note that on October 14 price jumped up and tagged the bottom of the prior channel.  That is normal behavior as price 'corrects' to a level that was once support.  

Also - many traders are waiting for some form of meaningful retracement off of the October lows.  Well, on October 14, that bar not only touched the prior channel (now resistance), but it also represented a 38% price retracement of the August - October decline, a common retracement level in weak markets.  So the point is that the expected retracement may have already occurred. 

Finally, notice the new downward channel (plotted in red) that has formed on the price chart.  Granted the channel is fairly new, but it could be an indication that another leg down is just beginning.  

If the momentum indicators are correct, we could see another pop to the upside next week.  If that occurs, the market won't have far to go before it needs to sell off and reset for another rally attempt.  If no such rally occurs, the new downward channel takes precedence and we could be in for another painful month.  

No matter which side you play in this environment, take small positions and keep your stops tight as major moves in either direction can come from left field and wipe out the careless trader.  

Below is the Nasdaq chart I referred to above: