In recent months, I have clung stubbornly to the idea that the stock market would have one last hurrah before collapsing to usher in a Second Great Depression that has long seemed unavoidable. I’d have to concede that it felt good to be among the few permabears who happened to be looking for sharp rally — in this case, to Dow 17622, nearly 1200 points above Thursday’s settlement.  However, it is days like yesterday that should prompt one to re-examine such assumptions.

To be sure, even though the Dow was down 216 points at low ebb, the selloff did only moderate technical damage. As you can see in the accompanying chart, the current slide has yet to exceed either of two distinctive prior lows recorded, respectively, on May 7 (16519) and April 28 (16479). A breach of one or both would make the Industrial Average ‘bearishly impulsive’, reviving a threat that last surfaced a month ago when the Dow sold off 616 points after hitting a marginal new all-time high on April 4. Scary as the decline seemed at the time, the blue chip average reversed direction sharply, rallying to a series of new record highs that culminated with Tuesday’s 16735.

It should be noted that each of these new highs occurred on decreasing volume, a red flag for technicians. But do we now infer that the bull is dead? I’m going leave that question open, although odds of a ‘yes’ answer would increase somewhat if in the days ahead the Dow breaches the key lows noted above.  As a practical matter, I plan to take both sides of the bet. I already swung and (quite possibly) missed with the purchase on Wednesday of 40 out-of-the-money call options in DIA for 0.08 apiece.  Now, I’ll be looking to get short with the acquisition of out-of-the-money puts on the next rally.  To merely mention this, however, is to invoke the possibility that “the next rally” will not provide the fat opportunity we might hope for to buy put options on-the-cheap. The market makers who would sell us those puts are no fools, and with yesterday’s selloff, they will not be looking to dump puts in our laps at fire-sale prices. If stocks have indeed entered a bear market, puts are going to become increasingly dear in the days, weeks and months ahead. Moreover, rallies are not likely to behave act as we might wish or expect.

Whatever happens, I will adhere more closely than ever to purely mechanical means of assessing risks along the bull/bear divide.  Both camps will be with us, as always, regardless of whether the Dow is on its way to 20,000 or 6,000.