Let's take a quick moment as we begin this Tuesday to view the Daily Structure of the Dow Jones Industrial Average for possible clues of the action ahead.
Dow Jones Daily:
Looking backwards first, we note the pronounced, multi-swing negative momentum divergence - as well as price testing resistance via the 200 day SMA - preceded the recent downward plunge in the market. Given that the broader trend is down, this should not have come as a surprise. What was surprising - to me at least - was just how overextended price became, and how it seemed a ‘bounce' was forming earlier.
The bounce finally came, which is again classified as a "Bear Market Rally" or counter-trend retracement, and as such, prices often move violently against the trend (typically as shorts cover and bottom-fishers and long-term value players emerge). Risk was still high to the downside via the overall structure, and price could reverse at any point, which it did, and gave us two trend days down in the last three trading sessions.
A positive momentum divergence, as well as a large volume 'surge' preceded the recent sharp rally, which - as of this morning - has only retraced the key Fibonacci 38.2% retracement and found resistance via the Bollinger Band, just shy of the clearly falling 50 day EMA.
The trend is still down and we are still experiencing a dominant (current) swing in the direction of the trend. Should price indeed form a higher swing low at this point, we would have additional confidence that a trend reversal could be in the works (a trend reversal is a three-step process), but until that happens, we will have to assume that the pathway of least resistance, and greater probabilities, is down, perhaps again testing the Dow 11,000 or lower.
All bets are off to the long-side should price make a new low for the year. It's probably best to cease trying to call a bottom in this type of market anyway.