Stocks opened with a technical recovery yesterday after a drubbing on Wednesday. This followed positive news from Europeand a drop in weekly jobless claims. By 10 a.m., the Dow Jones Industrial Average was ahead by almost 200 points. But a sell-off in the afternoon in technology stocks drove the broad market lower, and by late afternoon, the Nasdaq was deep in the red. A late rally recovered most of the losses, but the Nasdaq closed the day down 0.43%.

Yesterday’s extreme volatility may not be evidenced by the closing numbers. But note yesterday’s trading bar showing a swing from high to low of 4.25%. Despite the dizzying pace, the Nasdaq failed to close higher. Even more important was its failure to hold above the 20-day moving average (green line) and its consistent inability to mount an attack on its 50-day moving average (blue line).

There is but one favorable comment about this chart, and that is its ability to hold above the support line of the bearish flag — yesterday its low hit the line and rebounded. But the stochastic has a nasty downward direction, which tells us that it’s only a matter of time before the important support line is demolished.

The NYSE Composite contains all of the stocks traded on the Big Board, thus it is a broad cross-section of all industries and sectors. Note the breakdown at 7,000 from a triangle followed by an attempt to consolidate within a pennant with its midpoint just under 7,000. The index rose 1.4% yesterday, and the stochastic, though negative, is attempting to turn up. Therefore, we may see a continuation of yesterday’s late rally and even a test of the NYSE Composite’s resistance line just above the 20-day moving average at 7,115.

With all major indices in sharp declines, there is no evidence of heavy institutional buying, although we may have seen some late buying yesterday since the third quarter ends today. Our internal indicators (MACD, stochastic, RSI, momentum) are either negative or weak, and the sentiment indicators (AAII, VIX, insiders) offer no support to a market in decline. A late email from AAII yesterday showed that their sentiment survey has an increase in bullish sentiment of 7.2% at 32.5% — not good news since this is a “contra-indicator.”

The major trend is down. Don’t be drawn in by wild swings to the upside since these swings are a well-documented characteristic of a bear market. If you don’t want to sit on the sidelines, your best bet is to use options to capitalize on the volatility.

For a stock to short now, see the Trade of the Day.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.