As the debate rages on with regard to whether or not the Fed should begin to drain liquidity or if this economy can withstand a reduction in government spending, there are subtle things going on in this market that the fundamentalists are missing right now.  Market technicians have a wide array of tools that they can apply which gives you a real time snapshot of the emotions and tendencies of investors. 

There are many pundits who are calling for increased GDP numbers as well as improved earnings, but pure common sense says that none of that will happen while Americans continue to lose jobs.  As these point-counterpoint discussions continue, we need to take a look at one telling sign that the party may be over for now.  In fact, we could be in the early stages of forming another leg down. 

One indicator I have developed is a 21 period normalized daily range indicator.  It is simply the daily range divided by its 21 day moving average.   Daily ranges should show a gradual increase in healthy trends whether it is up or down.  As trends mature, the daily ranges contract due to the lack of euphoria and a smaller number of investors who are willing to jump in and push price higher. 

Notice in the chart below that the daily range indicator is showing the same sharp contraction as it did in September/October 2007, followed by an increase in the daily ranges as selling pressure builds.  That is a sure sign that the psychology of this market has changed.  Whatever the reason may be for the selloff (Greece, U.S. banking issues, China and India draining liquidity, etc.), there is real change happening here.  Now is not the time to get greedy, it is time to protect what you have.