Friday was a bad day for the market to say the least. I actually sold in the middle of the afternoon and took a small profit on the positions I bought in January. I had bigger profits earlier in the week so it was a bit disappointing to sell, but in bear markets you have to take what you can get. It is very difficult to play the long side during a bear market. More money is to be made shorting, but we still need to see the market rally and get overbought on an intermediate-term basis in order to be able to short safely. At the moment I feel like the prudent thing is to be in cash.

You have to respect bear markets and be very patient for entry points on the long and short side. Bear markets do not forgive those who refuse to cut losses or get out when things take a turn for the worse. In bull markets people who don't cut losses often get saved when the market rallies to new highs. In bear markets there is no saving. There is just carnage for the masses and only patient and prudent traders can make money in them.

You have to be totally disciplined to profit in a bear market. Otherwise you are best to stay in cash and get back in the market once the bear market is over.

I just tried going long in expectations of a market rally that would take the S&P 500 beyond the 1450 level. Friday's action makes it likely that the market will get near its January lows, and possibly even break them, before the S&P 500 will go above 1450 now despite the fact that sentiment is overly bearish and the market became extremely oversold on a historical basis back in January. The market is acting in ways that I have never seen before and no one I know has either. A retest of the lows to form a double bottom seems likely now, but there is always a risk of a crash in this market. I never said that type of thing in the 2000-2003 bear market, but this one is ten times more dangerous than that one ever was.

I pointed out to you the other week that the market has never made new lows without first having a huge rally when it became as oversold as it did in January and the Investors Intelligence survey displayed widespread bearishness. But if the market doesn't turn around and bottom Monday it will poised to go to its lows. This would be something we have never seen happen before with the oversold conditions of January. But I suppose this may end up being a bear market like none other once it is over.

During this bear market we may see a secular top in long-term bonds, a record low drop in the dollar, and gold trading in the thousands instead of the hundreds. Oh, and we are going to see real estate prices decline 20% from their highs, a few large banks go bankrupt, and the Federal Reserve take "emergency measures" to stabilize the situation. We've already seen the Fed lower interest in the past few months at a faster rate than they have ever before - faster than they did during the Great Depression - and all signs point to more interest rate cuts to come.

The Fed created this disaster by lowering rates and keeping them low for too long in response to the 2000-2003 tech bust, that was itself a direct result of a bubble created by too much easy credit and artificially low interest rates in the 1990's.

As Warren Buffett explained Friday in his annual letter to shareholders:

"You may recall a 2003 Silicon Valley bumper stick that implored, "Please, God, Just One More Bubble." Unfortunately, this wish was promptly granted as just about all Americans came to believe that house prices would forever rise. That conviction made a borrower's income and cash equity unimportant to lenders, who shoveled out money, confident that H.P.A. - house price appreciations - would cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief. As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out - and what we are witnessing at some of our largest financial institutions is an ugly sight."

Now the Fed is totally trapped in a nightmare of its own creation. Or I should say the US economy is trapped. If the Fed does not continue to slash interest rates and print money like mad they risk allowing a deflationary credit implosion to throw the economy into a depression. But by acting as they do they risk the worth of the dollar and if their plan doesn't work may find them rolling the dice at the end game of hyperinflation. Like a desperate gambler they have no choice but to double down and pray to whatever God the Fed prays too. It certainly isn't the God of the bible who preached prudence, against usury, and dictated a year of jubilee every fifty years directed against money lenders to check their power and prevent inflation. Our problems exist now, because the Fed has bailed out Wall Street and banks over and over again at the expense of the real economy.

"There probably will be some bank failures" - Ben Bernanke during Friday's Senate banking hearing

As the bear market and economic unwinding continue Bernanke's answers to questions will get even more bizarre. Here he explains that he sees no inflation, because it isn't registering in the so called CPI numbers. He is so nervous and fidgety. Whenever he speaks the market drops. Same thing with Bush. But Bush never appears nervous. He seems to go out of his way to appear to be tough and macho. That's how he looked last week when he said the economy was bottoming thanks to his stimulus program that will hit it in a few months. It's as if he thinks he can will things to improve. It's same type of talk we've seen for years when he speaks about Iraq.

Back in 1999 and 2000 when I railed on Greenspan for creating that stock market disaster I used to say "no one was driving the airplane." Well now the controls on the airplane appear to be locked.

But that's enough editorializing. What about the market? What do the charts say?

The price pattern of the market is once again dangerous. The market spent about a month after bottoming in January going sideways. I thought this sideways movement would end with a breakout to the upside that would bring a rally to the 1450 level on the S&P 500. Instead the market appears to have made a double top and is now poised to break support - which is at the 1320-1325 area on the S&P 500. If this level does not hold you can expect to see the S&P 500 trade below 1300 with a retest of the January lows extremely likely.

The action right now is very similar to what we saw in January. The market put in a bottom in November and then rallied sharply into December. It then topped out when the Fed cut rates and fell into the middle of the month. It then bounced into Christmas and made a double top. After that it fell straight down till the end of January. The price pattern right now is very similar to what we saw then. A double top appears to be in the making and it will be confirmed with a close below 1320 on the S&P 500.

If the S&P 500 closes below 1320 you can expect to see the selling pick up and culminate with another panic washout phase. At this point I think this is what is going to happen. It would take a powerful rally right at the start of this week to save it. Unfortunately we are in a bear market and you have to respect the bear.

One thing the market does having going for it is that sentiment is still extremely bearish. If the market falls to its January lows the bearish sentiment makes it likely that the market will succeed in putting in a double bottom. If that happens then the rally above 1450 on the S&P 500 will still end up taking place. It may not exactly go to 1450, but it will be close enough.

If the S&P 500 closes below 1320 one indicator I'll be watching closely again for a bottom is the VIX, which measures the premium option investors are paying for volatility. At times of great fear in the market the VIX tends to spike up. You can see how spikes in the VIX coincided with the market bottoms of August, November, and January. The daily stochastics on the VIX have crossed over from being oversold to giving a buy signal. If the S&P 500 breaks 1320 I would not look for a bottom until the daily stochastics on the VIX get overbought above 80. This would mean the VIX will end up going to its January high and probably even a bit higher. It would take a scary retest - and maybe even a slight break - of the January lows to cause this to happen and it will probably take 1 1/2 - 3 weeks to occur from now.

If we get a panic bottom I plan on once again taking a position in the market just like I did in January for a trade. Once I make a 5-10% gain I'll probably just sell it though and wait for another trade. In this market the next real high reward/low risk trades will be shorting once the market rallies for several weeks and/or buying gold stocks if they have a large correction.

Right now gold stocks are still trading with the broad market. If the market tests its January low then I expect gold stocks to pull down a bit. Right now the HUI has support at the 440 area. This coincides with its support trendline and 50-day moving average, which have both acted as support since August. If I see a panic bottom in the market and gold stocks are in this area I plan on taking a position in them too. I'll discuss this in more detail if we approach that point.

The TLT ETF, which tracks the 20 year treasury bond has also traded in a similar manner to the VIX in the past few months - spiking up during times of market weakness as investors flee stocks and throw their money into low yielding bonds as a safe haven. If the market tests its January lows I expect TLT to trade up to the 96-97 area. The January and November bottoms coincided with TLT spiking up and reversing. If the daily stochastics on TLT get above 80 and then we see TLT gap up one morning as panic appears in the market that will be another sign of a likely bottom.

At some point I expect bonds to lose their current safe haven status. I think this is when gold will totally break away from the market and wave three of the gold bull market will begin. I do not see this happening now. Perhaps this year though. Again this is a topic in itself that I plan on talking about in greater detail.

Let's see what the market does Monday. IF the S&P 500 can hold 1320 this week then all will be fine. If not then look for another panic washout to occur. I'll be looking to buy it, but the real trade of the year will come either when the market gets totally overbought and it is time to short or gold and gold stocks break away from the market.