It would be easy to hang your head here and decide that it just doesn't matter with respect to this market, but that would be a fools game. It does matter. It's your money and your future. Markets either:

1. go up
2. go down
3. go sideways

This market has been going down and going down big. When the going down exhaust itself, there will be a vacuum run back the other way. The harmonics of the market required it as the reverberation lower results in a large sine wave type motion back the other wave.

Here's a chart of the huge percentage rallies that occurred during the Great Depression (courtesy of Alpha Trends)

The reason for presenting this is to suggest that some of the best rallies in terms of percentage gains and in compressed time frames do take place in the most violent of bear markets and that is what we are in. When you get a 20% decline across the board and across the world, odds are you are going to get a heck of a bounce. Even if the downtrend is to continue, a natural Fib retracement of 38.2 on the SPX would take us back to 1070 or so. We closed at 899 on Friday.

Some sectors have been hit worse than others as forced selling was intensely concentrated as hedge funds were caught on the wrong side of the trade in leveraged positions and with no choice but to cough it up.

For a trader, what you should expect to happen is a 2 to 3 day spike up with lots of volatility during the day. If that spike comes on decreasing volume, which is highly likely, then a partial retrace of that move should come in rather quickly. Spreading short for that inevitable retrace is ideal. How that arrives and with what type of volume would set up the next part of the trade. If it comes back on lighter volume as I would expect it to, then you pull the short hedge and add some long exposure using the recent lows as a stop out.

Assuming all the above occurs, then you can work the trades longer looking for a retrace of 38.2 or 50% the big move down to occur over the next 2 weeks. Depending on how fast we move higher, you would want to parcel out those added long positions into that move and get short once more ... this time with the idea of seeing a retest of the lows made on Friday. As the market pulls back into those lows, we can see if the test fails or succeeds. We can see if their is positive divergence in the internals. We can measure the possibility of a strong bounce into the end of year or more pain.

If you believe this is a longer term bear market, then you are going to want to error on the side of caution with respect to the long positions - being sure to hedge those positions at every turn or to ease out of them with profits. I am in that camp right now.